Homeowners Insurance, Clarified: Replacement Cost vs. Actual Cash Value
Replacement Cost vs. Actual Cash Value
Your homeowners policy does not provide coverage for all potential catastrophes that could damage or destroy your home. Earthquake and flood are two “perils” for which there is no coverage.
You can get coverage for earthquake and flood damage in a separate policy or as an endorsement to your homeowners coverage. Also, there is no coverage for damage caused by water that seeps into your home from the ground.
You do have coverage for losses related to:
- Fire
- Smoke
- Lightning
- Wind storms
- Hail
- Explosions
- Vandalism
- Theft
There are different ways to insure your home: Structure and your Personal Property.
There are two types of coverage: Replacement Cost and Actual Cash Value.
Structure
Replacement cost is better for you, the homeowner. 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.
Building costs are calculated on a square foot basis. As such, to determine the cost to rebuild your home, take the square footage of your house and multiply by the average per square foot building rate in your area.
Personal Property
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 $1,000 coverage for your jewelry if it is lost or 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.
Speaking of need, you need to take written and visual (still pictures or video) inventories of everything you own in your home and in other buildings on the property.
Include all:
- Furniture (indoor and outdoor)
- Appliances
- Stereos
- Computers and other electronic equipment
- Hobby materials
- Recreational equipment
- China and silverware
- Kitchen equipment
- Linens
- Jewelry
- Clothing
For the major items (computers, televisions, stereo systems, etc.), for each one, write down:
- Serial number
- Make or model number
- Purchase price
- Present value
- Date of purchase
If you have the receipts for the items, attach them to the inventory. Make at least two copies of the inventory and store one of those copies offsite – a safe deposit box is a good place. Store the pictures or video of the inventory offsite as well.
(877) 783 – 0335
© 2008, Mark S. Balcos. The reader assumes all responsibilities for his/her own actions in regards to any items discussed in this report. Adherence to all applicable laws and regulations, federal, state and local, governing the use of any product or service described in this report in the US or any other jurisdiction is the sole responsibility of the reader. The publisher and author assume no responsibility or liability whatsoever on the behalf of the reader of these materials. The reader is encouraged to consult directly with his/her insurance professional.
Balcos Insurance Community Home | Balcos Insurance Main Website
