Replacement Cost Vs. Actual Cash Value Coverage

There are different ways to insure your home, both the structure and your personal property. There are two types of coverage: replacement cost and actual cash value. Replacement cost is better for you, the homeowner.

Let’s take the structure first. Under replacement cost coverage, the insurance will cover the cost of replacing the part of the structure that is damaged, up to a maximum dollar amount. Under actual cash value, the insurance will cover the cost of replacing the damaged structure minus an allowance for depreciation. If you have an older home, that allowance could be quite significant. Unless your policy specifically says it provides replacement cost coverage, the coverage is for actual cash value. So how much insurance should you have? Basically, unless you want to pay some of the costs yourself, you should insure your home for what it would cost to rebuild it if your residence were destroyed. How do you find this out? Your insurance agent can have an answer for you in no time, or look on an appraisal, page 3, for a rebuild cost break down. Do not look soley at county appraisals, or market values as they both do not measure the cost to rebuild a structure.

Your possessions are also insured on a replacement cost or actual cash value basis. Again, unless specified otherwise, the coverage in your policy is actual cash value. Homeowners policies also have limits on coverage for such items as jewelry, fine art and computer equipment. Read your policy and see what these limits are. For example, the standard policy will provide a maximum of $2,000 coverage for your jewelry if it is stolen. If you have lots of jewelry, fine art or computer equipment, you should consider purchasing a special personal property endorsement or “floater” that provides the coverage you need.

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