There is no place like home. Dorothy from The Wizard of OZ spoke this line. It tells us how important our home is because it is our happy place. It is where we build memories, where we build our dreams, and where we feel the safest and most secure. Our home is where love abounds. This article will debacle about actual cash value VS. replacement cost.
Protecting our home is essential. Accidents do happen. A fire may break out. Thieves can enter our home. There will be hurricanes, floods, tornadoes, and other natural disasters. All of these can destroy our precious homes. If one of these problems occurs, how do we rebuild our homes and replace our possessions?
This is where homeowner’s insurance for your property can help. To safeguard your home, getting coverage for your property and personal belongings is wise. Even if all your possessions are lost and your property is damaged, you can rebuild your home and make new dreams and memories with the right home insurance policy.
Homeowners Insurance Defined
A homeowner’s insurance policy insures your home and your possessions in the event of disasters or destructive events. It covers damages to the home and personal assets, including interior and exterior damages and theft. A homeowner’s insurance may also offer liability coverage for when an accident occurs in your home or on your property. Earthquakes and floods are Acts of God and are not part of the coverage. However, you can get special coverage living in disaster-prone areas.
It is not a requirement of law that you get home insurance. However, it is wise to get one for your protection. Mortgage companies will require you to have insurance to protect them in their investment just in case your house catches fire or gets damaged through natural disasters like tornadoes and hurricanes. If you fully own your home, it will be your biggest asset, and you would want home coverage to protect you from property loss, or in the event of injury in your property, you will be part of the coverage.
Types of Homeowners Insurance Coverage
A homeowner’s insurance is a general term for a series of coverages or policies available for your home or property. Depending on your insurance agency, you can avail of several types of coverage. Two of the most important choices are the Replacement Cost and the Actual Cash Value. These two will determine the cost of rebuilding and replacing your possessions. As with other types of insurance, the premium cost will depend on the coverage, and the amount limit you can get will depend on the premium you pay.
Actual Cash Value VS Replacement Cost
Replacement Cost Coverage
Replacement cost is the amount to replace damaged property or rebuild an item with similar materials. This type of coverage can include personal belongings and your home without deducting for depreciation. A good example is a 3-year-old washing machine. If it gets destroyed or stolen, your coverage will allow you to buy a new washing machine with similar features at the cost today, even if the damaged one is cheaper now than when you bought it.
If you have a cabinet made and you destroy it, we will use the cost of building a new one with the current price of supplies and materials instead of the prices when you had it built. Replacement cost will always be at the current value and cost.
Actual Cash Value Coverage
With this coverage, the depreciation value factored in will determine the cost of property damaged or lost. Using the example of the three-year-old washing machine, if you bought the washing machine for USD300.00 three years ago, the value would only be about USD120.00 today. Your coverage will only take the amount of USD120.00 into consideration during evaluation. Since an actual cash value coverage will only reimburse you the depreciated value, your out-of-pocket cost to replace or purchase a new one will be more significant.
Things to Consider When Choosing the Right Coverage in Actual Cash Value Vs. Replacement Cost
Before deciding what type of coverage you will get for your home and properties, you must consider a few things to determine which one is the best for you. Here are some of them:
- The Age of your Home – the older your property and belongings are, the more difficult it is to replace or restore. Most home insurance companies will not be able to offer you replacement costs because of the value of antique possessions or materials used to build your home that is authentic and hard to find. You can ask your agent what other coverage is available to ensure you get the same quality when you rebuild.
- Premium Cost – we all know you need to pay a higher premium if you want a higher claim. The cost of having your belongings and properties replaced will require more extensive coverage. As such, you will pay more to ensure you will receive compensation if you rebuild your home.
- Mixed and Special Coverages – there are certain coverages that you can add on for particular possessions or property. Depending on the item’s value, you can use actual cash value coverage and add the replacement cost coverage on another item. Antiques and other collectibles often have other special coverages that you can purchase.
- Location – if your property or possessions are in a problematic area prone to disasters and theft, you might consider getting replacement cost coverage.
Other things to consider
It is easy to see that getting the Replacement Cost coverage is better than the Actual Cash Value coverage. Although it will be more expensive in premium cost, you will not need to dig deep into your savings when disaster strikes and accidents happen. You will receive a higher payout for your possessions if they get damaged, or someone steals them. You can rebuild your home if a fire or natural disaster strikes them.
The premium price you will pay for Replacement Cost coverage will benefit you. Any family needs to be able to restore their home if it obtains damages and replace their possessions in case of loss. Rebuilding may take some time, but you have an assurance that you can do it knowing you have the coverage you need.
Checklist for your Replacement Cost Coverage
- Make a detailed list of all your possessions and update them regularly. It is better to jot down all the details, including descriptions, the year bought, and the price. Keep your list in a secure place like a bank deposit box or give copies to your relatives for safekeeping in case your home gets destroyed. This will help you remember all the essential things you have that need to be replaced.
- Estimate the cost of rebuilding your home and compare it to the maximum amount your insurer will pay you in case of disasters. Include construction costs and the materials you need to rebuild. Update every few years.
- The location of your property is essential when deciding on your home insurance. Living where hurricanes and floods are frequent may need extra coverage. Areas with gangs and local thieves may also warrant a higher premium.
- Get an experienced insurance agent. Estimating your coverage cost will be a breeze if you have an experienced agent. He or she can include all factors for a more accurate calculation.
- Review the limits on personal possessions like jewelry and antiques. They will be hard to replace, and their value may be too much for your coverage. You may need to buy additional policies to cover these items.
- Consider hiring an independent home appraiser. To give you an idea about your area’s property value and construction codes, it’s best to talk with an appraiser. They can also help you assess your coverage needs best. Updates will also be needed so you can adjust your insurance policy accordingly.
Getting home insurance may seem to be overwhelming. There are many things to consider and many choices to make. Your home is your biggest asset, and protecting it will help you sleep well at night. Getting good coverage may be expensive, but your payout will lessen your out-of-pocket cost. Determining the best coverage will be easy if you have the right insurance company and agent. We hope you learned much about this cash value vs. replacement cost debacle.
And if you are on the lookout for the right insurance company, we are here to give you that peace of mind. Our Homeowners Insurance Experts can help you get the right coverage for your home. Advantage Insurance Solutions in Denver, CO, can assist you anytime. Call us today and let us discuss your home insurance needs.