With home insurance, having enough coverage to protect your home is always critical. Yet, it is not uncommon for property owners to find themselves with too little protection when a significant claim occurs. To avoid this problem, be sure you choose enough coverage and the right type of protection. With home insurance, this means considering actual cash value and replacement cost coverage. What does that mean?
When purchasing home insurance, you need to know how much the insurance policy will pay you if there is a significant claim or event. It is very important to consider this for a situation of a total loss when repairs are not possible on the home.
What Is Replacement Cost Coverage?
With replacement cost coverage, the amount of your policy matches the cost to replace your home if destroyed or damaged. The policy will pay you at the same value the home is right now. This is the amount it would take to replace your home in a total loss. In this situation, if the home is a loss, the insurance company pays the amount it takes to cover replacing it with a new home.
What Is Actual Cash Value Coverage?
Actual cash value is a bit different. Insurance companies base this on the current market value of the home or on the initial cost of the home along with additional personal property. The key difference is here is depreciation. The policy looks at the value of the home minus any deprecation impacting its value. Therefore, you might recover less money for a 10-year-old damaged TV than a brand new damaged TV.
Structure and Personal Property Protection
Most home insurance policies cover the structure of the home and the personal property you have within it. Many times, the dwelling component of your policy will reflect replacement cost coverage. That is, the company will pay the cost to rebuild the home (though you may need additional endorsements for some circumstances).
However, the personal property within is typically based on actual cash value or the purchase price of the item minus the depreciated value. Still, some policies will offer replacement cost coverage, and you can also use scheduled items endorsements and other riders to insure certain items at replacement cost.
You can choose the type of coverage that fits your needs. However, keep in mind that the replacement cost coverage policy tends to cost more than actual cash value. That is because it typically pays out more than what you could expect from actual cash value. A customized insurance plan is best for your needs. Turn to your agent for more insight into which policy is right for you.