Insurance policies offer several calculation options, so it is important you understand precisely what you’re buying and whether the policy provides what you expect when you file a claim.
Judging a policy strictly on your premium doesn’t necessarily provide you with the best compensation when you experience a loss. Here’s the difference between actual cash value and replacement cost policies.
Replacement Cost
As the name suggests, a replacement cost homeowners insurance policy provides compensation so you can replace your damaged or stolen property with something of the same quality and kind. The insurer does not discount the value due to wear and tear.
These policies do cost more, but they also offer the homeowner more compensation. A claim for a single expensive item could easily cover the premium difference. If you experience a substantial loss, a replacement value policy is even more worthwhile.
Some homeowners’ policies offer replacement value for the structure (excluding land and belongings). However, it is important your policy reflects the true cost of your home.
Rely on a professional for an accurate estimate of your home’s value. A contractor or appraiser can price the cost of building materials, upgrades, and additional living space for an accurate insurance amount.
Actual Cash Value
Many homeowners buy their insurance policy based on the premium without reading the fine print. Most standard homeowners insurance policies offer actual cash value for the insured’s property. These policies are less expensive to buy, but they also offer less compensation.
When a homeowner files a claim, they’re often surprised to discover that they won’t receive full compensation for their loss. Insurers calculate actual cash value by determining the replacement cost, less depreciation. This reflects the amount you would receive if you sold the item on the open market.
Unfortunately, the condition of the stolen or damaged property as well as the property category affects the pay out too. Some items such as electronics depreciate very quickly. If you’ve had the item for some time, it may fully depreciate and your insurer may not offer compensation at all.
For instance, if you bought a flat screen TV for $2,000 five years ago and the insurance company estimates its’ useful life is only ten years they would only pay you $1,000. The TV depreciates $200 every year until it has no value.
Obviously, you will lose a good chunk of money if your ever need to file a substantial claim. The lower premium may not be such a good deal after all.
Unless you’re an insurance expert, it can be difficult to compare policies for the best value and coverage. That’s why it makes sense to rely on an independent insurance agency like ours. We know the industry, terminologies, and products.
We’ll sort through the offerings, suggest your best options, and answer your questions. The lowest premium isn’t always your best choice if it leaves huge insurance gaps that could cost you dearly later. Contact us today for a free quote.
