A Newbies Guide To Insurance Basics – Part I

Understanding the basics of replacement value and coverage is critical when it comes to homeowners insurance.  So let’s dive in!

The Basics of Being Made Whole –

The difference between “replacement cost” and “actual cash value” before buying homeowners insurance. 

• Replacement cost is the amount required to rebuild or repair with materials of similar kind and quality, without deduction for depreciation.
• Actual cash value is the value of property when damaged or destroyed, usually calculated by subtracting depreciation.
• Depreciation is the decrease in value due to age or wear and tear. 

Most policies contain replacement cost coverage on the home and actual cash value coverage on personal property.

The Basics of Coverages – 

The basics of coverages.

• Replacement cost coverage is limited to the amount of insurance you choose to buy (stated on the declarations page). Purchasing less than 80% of the replacement cost of your home may result in the insurance company not paying the total cost of loss. Refer to the “loss settlement” section of your policy for more information on how the settlement is calculated.
• Actual Cash Value is the value of your property when it is damaged or destroyed, usually determined by subtracting depreciation from the replacement cost. Contents coverage often uses this basis.

For example, a computer costing $1,000 to replace may have a reasonable “life” of 5 years. If it is destroyed after 2 years, its actual cash value will be much less than $1,000, probably about $500. Most policies pay for losses to your contents on an actual cash value basis.

• Guaranteed replacement cost coverage provides more comprehensive protection for your home, paying the full cost of rebuilding if it is damaged by a covered peril, even if the cost exceeds the policy’s coverage limits.

To get guaranteed replacement cost coverage, you may need to meet certain conditions, like setting dwelling limit to 100% replacement cost and regularly increasing the insurance amount to match inflation. This coverage may not be available for older homes.

Any discussion about homeowners insurance should include riders, additional policies that provide extra coverage beyond basic policies. Next month, we will cover all the riders that can financially protect you if something happens to your home.

At Lindow, we strive to help our customers get the most protection for their money by providing comprehensive coverage reviews, advice on additional services, and assistance with any problems. 

Contact us today for no hassle answers to all your insurance questions.