Homeowners insurance plays a vital role in responsible financial planning. To make sure you're properly protected, it's important to understand how your insurer will compensate you if you need to make a claim on the policy — specifically, whether the company will use the replacement cost or actual cash value.
Homeowners insurance covers both your dwelling and your personal property. Under most standard policies, your dwelling is covered on the more generous replacement cost basis, and personal property claims are handled using actual cash value.
Replacement cost is what it would take to rebuild your home or replace your possessions with comparable quality at today's market prices.
Actual cash value starts with replacement cost but marks it down to reflect depreciation, which is the gradual loss of value that happens over time as things age.
You typically have the option to pay a little more and enjoy the extra security of having replacement cost coverage on your personal property, too. That could be a smart move, since this type of protection does a more complete job of making you whole again after a loss.
Here is an example of these two work in action, if a few years ago, you spent $2,000 on a living room sofa that's depreciated by 30%. Similar, brand-new models now cost $2,500.
If it's destroyed, a replacement cost benefit would cover the full cost of a new $2,500 sofa. Using actual cash value, you'd receive only $1,400 — your original cost minus 30% depreciation. If you wanted to buy a new couch, you'd have to come up with the extra $1,100 out of your own pocket. Keep in mind that with either type of coverage, your policy deductible will apply to the claim.
Getting the Right Coverage for Your Dwelling
Though dwellings are usually covered using the replacement cost method, if you want to receive that full benefit, it's essential that you sign up for the right amount of coverage.
Homeowners policies have provisions that reduce your benefit if the insurer finds you were under insuring your home. In fact, if you were remarkably low, the payout could be reduced all the way down to actual cash value.
When setting your dwelling coverage limit, keep in mind that real estate prices and property tax valuations don't really matter. Instead, focus on what it would cost to rebuild your home as it is now with materials of comparable quality. That could be significantly higher than the real estate market value.
Just as you maintain your home, it's also important to maintain your homeowners insurance policy by periodically checking to make sure your coverage is keeping up with current conditions, as well as with any significant changes you've made, such as installing more expensive flooring or renovating your kitchen.
Castle Real Estate, Inc.
3519 Patrick Street, Suite 255
Lake Charles, LA 70605
(337) 480-6555 Office
(337) 480-6557 Fax