Replacement cost represents the sum that’s required to repair, replace or even rebuild your home.
In the context of your homeowners insurance, you’ll want to learn the difference between actual cash value and replacement cost right away before it’s too late. Large sums of money can ride on the way that they’re distinguished.
Actual cash value
If you have an actual cash value homeowner’s policy, your structure and possessions are insured at their fair market value at the time of your loss or damage. Like a car, once you walk out of the store with your possessions, they’re used and they depreciate. That depreciation figures into the equation of what your insurer will pay you for your loss or damage. Your giant screen television is going to be worth considerably less money if it’s stolen from your home six weeks after you bought it. The real hit comes if your home is destroyed by a covered loss. You get the actual cash value of its fair market value in today’s recessed market. You’re still on the hook for the balance of the repairs, and you’re still paying your monthly mortgage payment. There’s another alternative though.
Replacement cost coverage
You’ll serve yourself much better by getting replacement cost coverage for your home and possessions. Replacement cost represents the sum that’s required to repair, replace or even rebuild your home with materials and workmanship like what was previously used. With replacement cost coverage, there’s no such thing as depreciation, even on personal property. Check your policy though. Replacement costs might be paid out in two installments. The first payment would be for the actual cash value of the repair or item. The second installment might reflect the total replacement cost after you’ve provided satisfactory proof of purchase or repair. This might still leave you in an out-of-pocket loss.
Replacement cost coverage is highly preferable to actual cash value coverage. Replacement coverage can save you tens of thousands of dollars in the future. Take note though. Even with replacement coverage, there are replacement value maximums that insurers will pay without special endorsements. Jewelry, artwork or other items worth tens of thousands won’t be fully covered without special endorsements.
When you’re talking with your agent, don’t hesitate to ask questions, and confirm that your home and possessions are completely covered for damage or loss. Don’t be afraid to pay for it either. You won’t regret it if you need it. Contact us to learn more.