Renters and homeowners insurance serve one purpose: to protect the insured against loss and damages. Most home insurance policies provide either actual cash value (or replacement cost) for assigning value.
Imagine your TV being damaged beyond repair by a fire in your home. The insurance company would pay you the actual cash value of the TV, which is the amount that you can sell it for on a market. You would likely not be able to purchase the latest version of the same TV if you account for depreciation. The insurance company would pay you the replacement cost to purchase a newer model of the same television at current prices.
It is more expensive than standard coverage, but replacement cost coverage can provide financial protection.
What is the replacement cost?
Most things lose value over time. This includes personal belongings as well as the materials that were used to build your house. A standard HTML-3 home insurance policy usually includes replacement cost coverage. This means that the insurance company will cover the costs of rebuilding covered structures with current materials up to the limit of your coverage. Unless you choose to add replacement cost coverage, the same policy will only cover your personal possessions at their actual cash value or current market value.
A replacement cost coverage might be useful for something like a house security system. You would be able replace a damaged security system with the latest version of the system without any additional out-of pocket costs. Be aware that personal property coverage will have limits. You may need to buy scheduled personal item coverage if you own a lot of costly items.
Extended or guaranteed replacement cost coverage
You might also want to consider a few special types of replacement cost insurance.
Guaranteed replacement cost coverage covers the cost of rebuilding or replacing assets that have been damaged in an insured peril. If your dwelling coverage is only $250,000 but your home’s rebuild cost ends up at $300,000, then guaranteed replacement cost coverage could pay for the rebuild, even if it exceeds your policy limits. This type of coverage typically allows the insurance company set the guaranteed replacement costs and increase them as necessary. However, you need to remember that even this coverage has limits.
Extended replacement cost coverage covers a percentage of the coverage limits, usually 25-30 percent. If your policy limits are $200,000 but your home needs to be rebuilt at a cost of $250,000, then an extended replacement cost endorsement would cover up to 25% beyond the policy limits. It is similar to guaranteed replacement costs coverage, but it specifies a percentage amount above your coverage limit to cap what your insurance company will pay.
These endorsements can be significantly more costly than standard personal or dwelling coverage. These endorsements may be worth looking into if you need more protection in the long-term. Talk to a licensed agent from your home insurance company about whether these types of coverage might be right for you.
Insurance companies determine how replacement costs are determined
The cost of replacement is not always related to the price you paid for your house. When underwriting your policy insurance companies consider figures like labor and building costs in your area, rather than market values.
In order to get reimbursement for the replacement cost of a loss, you might need to prove to your insurance that the property was worth the replacement cost value. It is important to show receipts for larger-ticket items. A inventory list listing all items, with a description and value, is essential to get a claim paid.
To maximize your replacement cost value reimbursement, you might be able to use the “Scope of Loss” alternative if you are unable to provide receipts, photos, or other documentation. A contractor will be needed to prepare a detailed report that details all items that require repairs or replacement, and makes recommendations about which aspects of the rebuild should be prioritized.
Actual cash value vs. Replacement cost
Now that you are more familiar with the meaning of replacement costs insurance for homeowners and renters, let’s talk about the difference between actual cash coverage and replacement cost coverage.
You can get reimbursement for new versions of older items with replacement cost value coverage. Actual cash value coverage is less expensive than replacement cost insurance, but it pays for the goods that you have lost at a lower price.
If your granite countertops are more than 5 years old and need to be replaced, your insurance company will adjust the countertops’ value, and you will get a reimbursement that is lower than what you paid originally. You can purchase granite countertops comparable to the ones you have now, subject to your coverage limits.
Actual cash value vs. the market value
Market value and actual cash value are different, especially in the case of home insurance. The market value of a property or home is what an appraiser determines it to be worth. It is also the price someone would pay for it. It is determined by what the market is willing and able to pay. Insurance companies that cover homeowners do not use the market value of their homes and belongings. Instead, they use the actual cash value to reimburse the insured for items lost or damaged due to a covered peril. Home insurance policies cover rebuilding damaged structures due to a covered peril.
Questions frequently asked
Is it better to have actual cash value coverage than replace value insurance?
The way your insurance company will reimburse you depends on your property’s age and value, as well your ability to afford home insurance. Standard home insurance policies usually include replacement cost coverage for your structures or dwelling. This coverage is usually not included in the standard home insurance policy that covers your personal property, but it can be purchased as an endorsement for an additional fee.
Some people might prefer replacement cost coverage, which will reimburse you for the purchase of new items. Although actual cash value coverage is more affordable, it means that your property’s value will decrease with age. This leaves less money to replace the items.
What amount of homeowners insurance should I purchase?
Everyone will need different amounts of home insurance. Start by looking into local building costs to see how much it would cost to rebuild your house if it was destroyed. You might also want to compare coverage options and obtain multiple quotes from different companies for the same type of coverage. Talk to a licensed agent about your insurance needs if you’re not sure how much coverage you should request.
What happens if my cost to rebuild my house is higher after a hurricane hits?
A shortage of qualified contractors and materials is common when disaster strikes. Prices rise as there is more demand for reconstruction. Your homeowners insurance policy might cover increased costs if you have extended or guaranteed substitute cost coverage. Your home insurance will not cover your belongings and structures beyond the limits of your policy. Only for damage that is caused by covered perils. Flood insurance is not covered by standard home insurance policies. You might want to purchase flood insurance if you live in an area that is susceptible to flooding.