Property Coverage
One of the most griped about things we hear in the insurance industry from property owners is that they have too much coverage on their house, or my house isn’t worth that why do I have so much coverage on my dwelling?
The answer to these lies in the type of policy valuation you have or the type of coverage you want.
Replacement cost or Actual Cash Value
Replacement Cost
Replacement Cost is defined or explained by the cost to repair or replace the property on the same premises with comparable material of like kind and quality.
Most insurance companies require you to have full replacement cost on your homeowners’ insurance policy and also some other property that you may own, whether it’s a rental property or secondary seasonal camps or things along those lines that you have personally.
This is especially true when you have a loan or mortgage on that property.
Replacement Cost Policies will pay to rebuild or replace your property for all covered claims up to the Dwelling Limit on the policy declaration page, minus your deductible.
Actual Cash Value
Insurance policies define Actual Cash Value as the cost to replace with new material of like kind and quality, minus depreciation.
The determination of what the Actual Cash Value coverage is for your property is based on the market value but be cautious as each insurance carrier will have different guidelines of what coverage they will accept depending on what kind of property it is.
The Depreciation used in the Actual Cash Value rating is determined by the insurance adjusters as they factor in age, type, pre-existing condition of the property. Another term used in this is the fair market value.
Homeowner’s Policy
Most homeowner’s policies will be written to replacement cost for the dwelling and actual cash value for the contents. An endorsement can be added and should be added, which will give you replacement cost on the contents as well.
Rental or Investment Property
Unlike homeowner’s policies where we see replacement cost most of the time, rental policies tend to have more options depending on the individual circumstance.
When properties are paid for and have a lower Fair Market value compared to what the replacement cost on the property would be, we start to see more consumers looking into an actual cash value policy.
Condition of property is another prime reason that consumers and insurance companies would rather insure a property on an actual cash value basis.
What I would be cautious about is making sure you understand what coverage valuation you have so you aren’t surprised in the event of a claim.
The biggest concern is partial loss. If you aren’t expecting the Actual Cash Value payout on your $50,000 kitchen fire, it will be a sticker shock.
What’s Next?
As mentioned Replacement Cost verse Actual Cash Value is one of the biggest concerns and questions insurance consumers have.
Talking with your insurance agent to discuss the options you have and what makes sense for your property is important.
Just because you think or want a specific coverage limit, doesn’t necessarily mean it will make sense premium wise.
Replacement Cost “rates” are significantly better than Actual Cash Values. So in many situations, it is cheaper to carry the better more complex coverage.
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