When you purchase a home insurance policy, you may hear the term replacement cost value. This is because you are generally recommended to carry enough home insurance to cover this entire value. 
The replacement cost value of your home is not the same as the amount you paid for it, however. Instead, your home’s replacement cost value is how much it would cost to completely rebuild the home after a disaster, including building and material costs.
You can have this amount professionally calculated or use online calculators by combining the value of your home per square foot with its permanent fixtures and amenities.
What Does it Do?
Your home’s total replacement cost value is what your insurance provider bases your compensation on. This is also known as the 80% home insurance rule.
In home insurance, you must carry at least 80% of your home’s total replacement cost value in home insurance, although 100% is recommended. Carrying less than 80% can leave gaps in your coverage when you have to file a claim after an accident.
Example of the 80% Rule Using Replacement Cost Value
Say your home is hit by a bad electrical fire that takes out half of the upstairs and a portion of the downstairs, leaving $40,000 in damage to your home. Your home’s total replacement cost value is $350,000 and you carry $140,000, which is 40% of your home’s total replacement cost value. Since the damages of $40,000 are significantly less than the amount of coverage you have, $140,000, it may seem at first glance that you will be covered for all of the damages.
Instead, the compensation you receive for the damages will be calculated based on how much you should have been carrying—80% of your home’s total replacement cost value which, in this case, is $280,000.
To calculate how much compensation you will receive for the damages to your home, the amount you are carrying will be divided by the amount you should have been carrying ($140,000 divided by $280,000). This is 50%, meaning the insurance provider will offer to cover 50% of the damages. Unfortunately, this means that in this case, you would have to face the remaining $20,000 of the $40,000 damages out of pocket.
Keep in mind that your home’s total replacement cost value can change. If you make updates or changes to your home, make sure to notify your insurance agent and adjust your policy’s coverage.