Home Replacement Cost Calculator - RCV Formula
Before you calculate your home's replacement cost value, you need to understand the replacement cost definition, when it is or is not used, and the RCV formula.
To learn about home replacement cost calculations, we will help you understand these topics:
- What is Replacement Cost?
- When is Replacement Cost Value Used?
- How to Calculate Replacement Cost & the RCV Formula
- Three Examples Using a Replacement Cost Calculator
- Free Online Home Replacement Cost Calculators
Replacement cost, also referred to as replacement cost value (RCV) or replacement value, is one of the calculation methods insurers use to decide the claim settlement amount they'll give you to replace or repair your home or personal items.
Unlike ACV, which gives you less than what you'll pay to replace an item, RCV provides you enough money to buy a new item or rebuild your home at today's price point with materials of like kind and quality to the original material used. However, the money you receive cannot exceed the coverage limits on your homeowners policy.
2. When is a Home Replacement Cost Calculator Used?
Replacement Cost is the typical calculation used for your dwelling, meaning your home and other structures on your property. Replacement Cost is one of the two most common calculation methods used by insurers to determine the amount of money they will pay on a claim. The other one is the actual cash value (ACV).
Actual cash value calculations typically apply to your personal belongings, like a sofa. There is also functional replacement cost, which is referred to for vintage style home constructions. And there are variations on all calculation methods (also used less frequently) described below. You can negotiate these calculations on your policy upfront to create a custom plan to suit your needs better.
Your policy's declaration page will state which method applies and include any unique legal terms describing use. It is essential to read these terms, which vary by policy, state, and insurance companies because one slight variation could cost you tens of thousands of dollars.
Other Claim Coverage Calculation Methods
Replacement cost value differs from an actual cash value policy, which is the cost of the property minus depreciation. It differs from the market value of your house, which is when a buyer would pay the seller for your home if it were on the market when neither buyer nor seller was under duress.
Replacement cost value also differs from either extended or guaranteed replacement cost. You receive more money if your home is damaged under extended or guaranteed value than you would for your home at replacement cost value.
To elaborate, extended replacement cost, also known as increased replacement cost, will cover the cost to rebuild beyond the coverage limits up to a ceiling of 20 percent to 50 percent above the policy limit. That is great for inflation when a storm destroys an entire town, and prices increase because everyone is rebuilding.
On the other hand, the guaranteed replacement cost will pay whatever it takes to replace your home or personal property, although there are some caveats.
How to Calculate Replacement Cost
While some homeowners insurance policies will specify exactly how to calculate replacement cost coverage, many will follow general rules and formulas.
General Overhead and Profit (GCOP)
Insurance companies typically pay contractors for materials and labor, and therefore allow payment for general overhead and profit (GCOP) to the contractor.
What is General Overhead and Profit (GCOP)? General contractors add the cost of materials and labor, called overhead, and a profit margin to come up with your replacement cost estimation. The custom percentages used are 10 and 10, the contractor will add 10 percent to their cost of actual overhead expenses and another 10 percent on everything for a profit. The profit is how they make money, their income.
Most RCV policies cover the general contractor's overhead and profit (or GCOP), but not all, so it is wise to check. Contractors do not work for free.
When doing your due diligence, investigate factors such as:
- whether they pay GCOP for single tradespeople or just companies
- state laws
- policy language
Dwelling and Personal Property Limits
Personal property and dwelling limits in your policy may also affect the amount of your RCV claim check.
Some insurers exclude the extra cost to bring an older home up to the current building codes. If you are required by law in your city or state to rebuild to code, you might incur a significant expense. We suggest you negotiate a change to this in your policy when you buy it or now.
3. Replacement Cost Value Calculator - the RCV Formula
The most straightforward RCV calculation formula for estimating your home's replacement cost value is to multiply your home's square footage by the average square foot cost to rebuild a home in your area.
Item Square Footage Rebuild Cost x Home's Square Footage = RCV
The National Association of Home Builders study shows that the average cost to build a new house is $115 per square foot, but this can vary tremendously based on where in the United States you are building your home.
The payment under replacement cost value (RCV) policies will vary depending upon whether the home is destroyed or damaged, provisions in your policy, whether GCOP applies, and state regulations.
This section will show you three (3) examples using the home replacement cost calculator and formula.
- Solar Roof Replacement using a Home Replacement Cost Calculator
- Full Sewer Line Replacement Cost vs. Replacement Cost + General Contractor Overhead & Profit
- Stolen Rolex Watch using Home Replacement Cost Calculator Homeowners Insurance Coverage
Example 1: Solar Roof Replacement using Replacement Cost (RCV)
In this example, we will estimate the replacement cost value to replace your solar roof that went up in flames.
Photo by: Jay Cole
Assume a fire destroys your 2500 square feet solar roof. It was a high-end Tesla solar panel roof and only five years old with a useful life of 20 years. Your cost of materials and labor to repair your roof, to its condition before the tornado, is $159,725.
Let us break that down. Tesla's solar roofs are roughly $21.85 per square foot, and $52,000 to $72,600 for the solar system, plus $17,100 for two Powerwall batteries. Your installation costs range from $8,000 - $20,000. Your quote for the installation package totaled:
$ 70,000 solar system
$17,100 two batteries
+ $21.85 per square foot solar panels x 2500 = $54,625 Solar Panels
= $159,725 Grand Total Cost to Replace your Solar Roof
Your policy has RCV coverage, so your insurer will give you $159,725 to repair your roof. (2500 sq. ft x $21.85 per sq. ft + $105,100 = $159,725) less any applicable deductible.
|Coverage Calculation Factors
- Roof Size - 2,500 sq. ft
- Solar Panel Cost - $21.85/sq. ft.
- Solar System Cost - $87,100
- Installation - $18,000
|Roof Sq. Ft. x Solar Panel Sq. Ft. Cost + Solar System Cost + Installation = RCV|
|Solar Roof Replacement Cost||$159,725|
|Owner Out-of-Pocket||Fire Deductible ($1,000)|
Example 2: Sewer Line Replacement Cost Value + GCOP vs. Actual Cost Value + General Contractor Overhead & Profit
In this case, we will compare RCV + GCOP vs. ACV + GCOP when replacement cost is depreciated, but GCOP is not depreciated.
The actual cost value (ACV) formula is the cost to replace a damaged item at today's price minus depreciation:
ACV = R × (E - C) / E
ACV = actual cash value
R = replacement cost or the current price to purchase the item
E = expected useful life of the item
C = current life of the item (how long you have owned it)
Let us assume finances were tight, and you bought a lower cost policy than RCV that uses ACV, and luckily it included GCOP. A neighbor, who drives a semi-truck for work, knocked over a tree on your lawn. The tree and weight of the truck destroy your sewer line.
The average cost of replacing an entire sewer line is $8,000 - $60,000 at $50 - $450 per linear foot. Material and construction costs vary based on the width and length of the sewer pipe needed. Your home was built in 1980 with clay pipes that have a life expectancy of 60 years, and today they are 40 years old, meaning under normal circumstances, they could have lasted 20 more years.
You live in an expensive area, and your contractor uses a trenchless pipe bursting method; your cost per linear foot is $200, and your line is 300 linear feet.
Your RCV + GCOP reimbursement is $60,000 ($200 x 300 linear feet = $60,000). Your contractor adds her 10%x10% = 21% GCOP which totals $12,600. Your final cost is $72,600.
Your ACV + GCOP reimbursement is $60,000 x (60 – 40) / 60 = $20,000. Your contractor adds her 21% GCOP which totals $12,600. Your final cost is $72,600.
You will pay $40,000 in out-of-pocket costs with ACV vs. RCV.
|After Neighbor's Lawn Rage||RCV + GCOP||ACV + GCOP|
|Coverage Calculation Factors
- Sewer Line Size - 300 LF
- Replacement Cost - $200/LF
- GCOP - 10% on 10% - $12.6K
|Sewer Line LF x Sewer Line LF Cost + GCOP = RCV||(RCV - GCOP) x (Expected Life - Current Life)/Expected Life + GCOP = ACV|
|Replacement Cost||300 x $200 = $60,000||300 x $200 = $60,000|
|+ GCOP (without depreciation)||+ $12,600||+ $12,600|
|Total Cost to Replace||$72,600||$72,600|
|Covered Amount||RCV + GCOP = $72,600||ACV + GCOP = $60,000 x (60 - 40)/60 + GCOP = $32,600|
|Owner Out-of-Pocket||deductible ($1,000)||$40,000 + deductible|
Example: Stolen Rolex Watch with RCV
An example of using RCV for your Rolex watch that you covered under a watch insurance floater (jewelry endorsement) added to your home insurance policy:
Let us say you put your Rolex watch in the accessories tray when going through the airport security system. But, beforehand, you had to cut in line to make your flight, and the woman behind you was mad. She stole your watch while you were distracted by thoughts of getting to the gate before it closes in 2 minutes.
Your Rolex watch was worth $73,000. That hurts.
In this case, your RCV insurance coverage would not need to use a home replacement cost calculator. Your insurer will simply send you a check for $73,000 minus your deductible.
Replacement cost calculations are based on square footage and other building features. Because of this, you can calculate the replacement cost of your home. In 2019, the average cost to construct a home was $115 per square foot, according to the National Association of Home Builders.
However, this building cost per square foot varies tremendously by region, so consulting a table of replacement costs by region would provide a more accurate estimate.
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