Home insurance is an important part of your financial health. It helps us manage the unexpected events in our lives. But not all insurance is created equal. Being financially fit means knowing the type of insurance that exists and more importantly, which one you have.
Did you know that when you buy an insurance policy, you may be given the options of insuring your property at replacement cost 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’s lost or damaged. A less common third option is called the guaranteed extended replacement option. What do they mean, and which should you choose? That’s what I’m here
to help you with!
Most people don’t know whether they have actual cost insurance or replacement cost insurance until a disaster hits home. The confusion around what kind of policy you have can create a lot of pressure when a claim is filed. Knowing the facts can mean 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 for policyholders to choose from. While replacement cost 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, minus depreciation, at the time of the loss. It doesn’t replace what you lost – instead, it reimburses you for the item’s current value.
To determine an item’s ACV, an insurance adjuster will take the cost of replacing your damaged or stolen property and reduce the cost of the property based on depreciation, such as age and wear and tear. An insurance policy with coverage based on actual cash value is the least expensive to purchase, since depreciation is considered and the claim payments are generally lower.
Replacement cost coverage is what it costs to replace damaged or stolen property without depreciation. If personal belongings are stolen, damaged or destroyed in a covered loss, and your policy includes coverage for RCV, your insurer will reimburse you for the full cost to replace the items at their current price.
Some home insurance policies and endorsements also cover the replacement cost of personal property. This is generally the most recommended option, since it gives the homeowner the option of returning to their living situation before the covered disaster occurred. Some replacement cost policies may also include money for you and your family to stay in a hotel while your home is 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 expensive) protection.
Extended replacement cost coverage is basically an expanded version of the 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 estimated value of the home. What this means is that unlike regular replacement cost 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 one area such as a tornado.
If your budget allows for it, extended replacement cost insurance is a good option when you live in a region that is prone to natural disasters such as tornadoes or floods. The extended replacement option can often cover up to an additional 20% to 25% of the replacement value of the home.
Now is the time to review your insurance policies to make sure you have the type of coverage that will accommodate unexpected life events that are bound to happen. Don’t wait until a disaster arises and the madness of the event causes chaos before you find out the hard way what is covered and what is not covered in your insurance policy.
For more information on this topic or other financial topics please email me at
[email protected] or call me at 662-624-5776.
Until next week — Stay financially fit!