In home insurance, what is typically used to determine the policy limits?

The replacement cost of the home is the correct factor used to determine policy limits in home insurance because it reflects the amount needed to rebuild the home using materials of similar kind and quality in the event of a total loss. This ensures that homeowners are adequately covered to restore their property to its original condition without accounting for land value or depreciation.

In contrast, the selling price of the home may fluctuate based on market conditions and does not necessarily represent the cost to replace the structure. The assessed value by local government is typically used for tax purposes and may not accurately reflect current construction costs. The mortgage amount may indicate how much is owed on the property but does not factor in the current costs associated with rebuilding, which could be significantly different. Thus, using replacement cost helps ensure that policy limits align with the actual financial needs in case of a claim.