How Home Insurance Replacement Cost or Actual Cash Value Can Determine Which Policy is Right to Buy
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UPDATED: Aug 13, 2020
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When you buy home insurance, you will need to decide how you want your policy to pay you in the event of a claim. There are two ways that your insurance company will pay for the damage under your policy: home insurance replacement cost or actual cash value. The difference between the two can be significant, especially in the event of a total loss, so you need to look closely at each and find the best home insurance policy for your needs.
Home Insurance: Replacement Cost vs. Actual Cash Value
When you are looking at home insurance replacement cost versus actual cash value, you need to understand what each one will do for you. The difference between the two applies when your insurance carrier pays out a home insurance claim:
- Actual cash value pays the cost to replace an item minus any depreciation. If you bought a stereo for $1,100 three years ago, and the stereo was stolen during a burglary at your home, then your policy will cover your loss. A homeowners insurance policy replacing the stereo at actual cash value means you will get a check for the original cost of the stereo minus three years of depreciation. The insurance company will calculate the depreciation, so make sure you ask the insurance claims adjuster how he or she arrived at your depreciation figure.
- Replacement cost pays to replace the item: If your homeowners insurance policy has replacement cost coverage, you will be paid for the cost to replace the item. HOWEVER, it is paid only when the item is replaced! Therefore, you will first get the actual cash value of the item, and if end up buying a replacement then you will get the balance of what the item was worth. You must keep all your receipts as proof of the replacement cost.
Home insurance replacement cost on your house will ensure that in the event of a total loss, you will be paid the cost to rebuild the home at today’s price. Actual cash value will pay you the cash value of the home at the time it was damaged or destroyed, regardless if it costs more to rebuild. Some home insurance policies have what is called guaranteed replacement cost of your home itself. It will pay for the replacement of the home even if it exceeds the coverage limits. However, to get this home replacement cost coverage you must insure your home for the amount the replacement cost estimation tool calculates it will cost to rebuild, which means you may need to buy more coverage than you planned.
TIP: To get home insurance replacement cost for your personal property or your home, some insurance companies require you purchase a replacement cost rider. Some of the best homeowner insurance policies have replacement cost built in, so keep that in mind as you shop
How to Buy the Best Home Insurance
Judging by the payout schedule, it would seem like home insurance replacement cost is the way to go with your home insurance coverage. However, there are some other things to consider before you buy your policy:
- How much can you afford? A home insurance replacement cost rider may cost as much as 10-20% of your premium. Therefore, the standard homeowners insurance policy would be cheaper with coverage at actual cash value.
- Are there risks of natural disasters that can destroy your home? If you live in an area with frequent tornado, earthquake, or hurricane warnings then you may want your policy to cover the replacement cost. If you have a huge loss caused bysuch as a fire or tornado, the total amount could be significant.
- How quickly do your items depreciate? If you own a lot of electronic items, which depreciate rapidly and significantly, then an actual cash value policy could leave you paying a lot of money out of pocket to replace your items.
In order to make your decision, you need to consider all the price and risk factors that can help you determine whether or not a replacement cost policy is worth the extra premium payment. You should also take time to shop and compare home insurance quotes and find the right policy for your needs and budget.
TIP: If you have an extremely tight budget, the basic coverage of the homeowners insurance policy at actual cash value will be cheaper. However, replacement cost gives you the total protection you need, especially in the event of large losses.
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