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Homeowners Insurance- Replacement Cost vs. Actual Cash Value

In our last blog we talked about what goes into determining the replacement cost of your home should a disaster strike.  The question was posed, is your home insured at full replacement cost and what happens if it is not?  Your agent can help you to determine the replacement cost by asking you specific details of your home and plugging them into the estimator.  

Below are the two ways that most losses are settled.

Replacement Cost:  The cost to repair or replace the damaged property

Actual Cash Value:  The cost to replace with new property of like kind and quality, less depreciation. Depreciation is the loss of value over time. 

Most insurance companies require you to insure your home at 100% of the replacement value, some companies have even come up with an extended replacement cost endorsement to protect you in case the value increases during the policy term and you would have a loss.  This way you never have to worry if your home is insured to 100%.  Be sure to ask your agent about this endorsement. 

If you do not insure your home to 100% you can suffer a co-insurance penalty or they could pay actual cash value.  For instance, your home is worth $100,000 and you insure it for only $75,000. If you have a $10,000 loss, the insurance company would only have to pay you $7,500 less your deductible.  So if you had a $1000 deductible, you would only receive $6500 for that $10,000 loss. 

Most companies have endorsements added to the homeowners policy to give you the replacement cost, just be sure to talk with your agent to make sure you have the best policy for your needs.  If you don’t have this, be sure to get a quote to see what the additional cost would be. 

One place that it might be beneficial to carry Actual Cash Value is on your roof.  This can also help you save some premium dollars.  Some companies are requiring ACV on roofs over a certain age, such as 15 years.  The reason behind that is they do not want you using your insurance for maintenance issues.  Roofs only last 20-25 years and your premiums are not meant to replace a roof that is at the end of its life cycle.  Just remember the ACV on a roof is only for materials and is not on the labor.

To wrap this topic up, be sure to review your homeowners insurance policy with your agent at least every couple years.  Let them know if you have made any additions or done any updates.  This can also help your agent find any discounts that might apply to your policy.  Most companies do give you discounts based on the age of the roof, whether you have alarm systems, if you carry other policies with them.

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