logo logo

Replacement Cost or Actual Cash Value Homeowners Insurance

fd-6Choosing replacement cost or actual cash value homeowners insurance may mean the difference of being fully covered. Consider for a moment that your home is destroyed in a fire. Almost everything you own is either destroyed by fire, smoke,  or the water used to extinguish the flames.

Immediately, you feel some relief because you are insured but that coverage may fall short of what your family actually needs if it covers actual cash value instead of the replacement cost of your property.

Many policy holders simply assume their homeowners’ policy will “make them whole” again after they suffer a loss but often they are disappointed because they did not know insurance companies have two different methods of determining how much you are owed on your claim.

In many policies, losses are compensated based on the actual cash value of the property. In other words, the company determines how much someone would pay for your clothes, home, jewelry, or other items at the time of your loss. This amount takes into consideration the item’s depreciation, the loss in value over time. As a result, the compensation you receive may not be enough to cover the cost of purchasing the property again.

On the other hand, you can have the policy provide you with the replacement cost of your property in the event of a loss. As the name suggests, your policy pays you what it costs to repurchase the property at current prices. Slash Your Home Insurance Premiums. Search for Lower Rates

Because replacement cost policies tend to cost more than actual cash value policies, many homeowners choose the latter based solely on the premiums. Unfortunately, in the event of a loss, the cost of that decision can become quite clear.
In the fire scenario, the actual cash value of your lost home may not be enough compensation to rebuild your home thus you may still find yourself in a bad predicament: left with a mortgage for a property you cannot neither live in nor sell. Additionally, the depreciation of personal belongings, including electronics and clothes, tends to be great so your compensation for those items may fall woefully short of your actual needs.

Whether or not you want to spend the additional money for a replacement cost policy, knowing the difference between these two valuation methods and knowing to ask your agent which method is used in your policy can prevent a horrible surprise when you do have to make a claim.