Home insurance is an important part of your financial health. It helps us deal with unexpected events in our lives. But not all insurance is created equal. Being financially sound means knowing what kind of insurance is out there and, more importantly, what kind of insurance you have.
Did you know that when you take out an insurance policy, you can have the option of insuring your property at replacement value or actual cash value? These are two different calculation methods used to determine how much you will receive from your policy to cover an item if it is lost or damaged. A third, less common option is called the guaranteed extended replacement option. What do they mean and which one to choose? That’s what I am here
to help you !
Most people don’t know if they have actual cost insurance or replacement cost insurance until disaster strikes their home. Confusion around the type of policy you have can create a lot of pressure when a claim is filed. Knowing the facts can be the difference between getting a new item (RSV) and settling for an item that is only comparable to the original (ACV).
Most home insurers offer all three options that policyholders can choose from. Although replacement value policies are the most popular, understanding each option will help you choose the right balance of cost and protection in your insurance.
Actual cash value coverage provides you with the amount needed to replace your damaged or stolen property, less depreciation, at the time of loss. It does not replace what you have lost, but refunds you the current value of the item.
To determine an item’s ACV, an adjuster will take the cost of replacing your damaged or stolen property and reduce the cost of ownership based on depreciation, such as age and wear and tear. An insurance policy with coverage based on actual cash value is the cheapest to buy because depreciation is taken into account and claim payments are usually lower.
Replacement cost coverage is the cost to replace damaged or stolen goods without depreciation. If personal effects are stolen, damaged or destroyed in a covered loss and your policy includes RCV coverage, your insurer will reimburse you for the full cost of replacing the items at their current price.
Some home insurance policies and endorsements also cover the cost of replacing personal property. This is generally the most recommended option, since it offers the owner the possibility of returning to his life situation prior to the occurrence of the covered loss. Some replacement cost policies may also include money for you and your family to stay in a hotel while your home is being rebuilt.
Guaranteed or extended replacement cost is the third option that can be considered. Policies with guaranteed or extended replacement cost coverage offer the most extensive (and most expensive) protection.
Extended replacement cost coverage is essentially an extended version of replacement cost value coverage, described above. This option pays the cost to rebuild your home exactly as it was before a disaster, even if the cost exceeds the appraised value of the home. This means that unlike regular replacement value coverage, extended replacement cost coverage protects you against sudden increases in materials or construction costs, which can occur when a disaster strikes many homes in an area, like a tornado.
If your budget allows, extended replacement cost insurance is a good option when you live in an area prone to natural disasters like tornadoes or floods. The extended replacement option can often cover up to an additional 20% to 25% of the home’s replacement value.
Now is the time to review your insurance policies to make sure you have the type of coverage that will adapt to the unexpected life events that are sure to arise. Don’t wait for a disaster to strike and the madness of the event to cause chaos to find out the hard way what is and isn’t covered by your insurance policy.
For more information on this or other financial topics, please email me at
[email protected] or call me at 662-624-5776.
Until next week — Stay financially fit!