When deciding on homeowners insurance you will be given the choice of two policy options to protect your home. These two options are Actual Cash Value or Replacement Cost Value. The option you choose will determine how much you will be paid out per claim to cover any losses or damages to your property.
It is crucial for any homeowner to know the benefits and disadvantages of Replacement Cost Homeowners Insurance and Actual Cash Value Insurance in order to make a decision that best suits you.
To help you decide on a homeowner’s insurance policy, here is everything you need to know about replacement cost insurance and the benefits of choosing this option. We will teach you everything you need when making a claim and how much you should expect to receive from a successful claim.
What is Replacement Cost Insurance Policy?
The replacement cost value is calculated using the initial price paid for the home and items, disregarding any depreciation costs.
If you choose a Replacement Cost Insurance policy for your home, any time you make a successful claim you will receive a payment equal to the amount required to replace your items. You will receive the amount it costs to replace your home and items with brand new items, unlike Actual Cash Value policy, where depreciation is accounted for.
If you require both your home and its contents to be covered by replacement cost insurance, you will need to purchase two separate policies. If you want both your home and contents to be replaced at the cost of purchasing it brand new, you need to specify this with your insurance company.
Replacement cost homeowners insurance is generally the most recommend option for homeowners as it allows them to return to a similar living situation before a disaster occurred. Without forcing you to dig into your savings to make up the difference.
Here are 6 reasons for you to choose a Homeowners Insurance Replacement Cost Policy:
- Replace Lost/Destroyed Items
- Rebuild Your Home
- Don’t Get Left Out of Pocket
- Extended Replacement Cost Insurance
- Cash Out Settlements
- Required by Some Mortgage Carriers
1. Replace Lost/Destroyed Items
Imagine spending a lot of money on an item that is special to you and then having something happen to it. You would want to be able to replace this item and receive fair compensation for your treasured items.
If you choose replacement cost insurance for your personal belongings you ensure that you are paid out enough to replace your items at the current market price for a brand new item. This will allow you to replace any lost or damaged personal items without forking out any extra cash.
2. Rebuild Your Home
Choosing a replacement value insurance policy will ensure that you are able to rebuild your home to its prior condition in the event of a disaster. Some insurance providers even provide extended replacement cost insurance on your home if the cost of rebuilding is more than originally estimated.
If your home is destroyed or damaged by fire or natural disaster and you have replacement cost insurance, your home will be rebuilt at or above the current market value and condition. You won’t have to add any money yourself or risk settling for anything less than the home you love.
3. Don’t Get Left Out of Pocket
If you do not choose a replacement homeowner insurance policy and stick with actual cash value policy, you will struggle to replace your home or items in the event of disaster. You will be forced to come up with cash to make up the difference between rebuilding and the amount you receive as compensation.
This can leave you in an extremely difficult position, as you may not be able to put any more cash forward in order to replace your personal contents or rebuild your home. You may have to settle with replacing your old home with something less satisfactory or come up with extra cash to replace it.
A home insurance replacement cost policy allows you to replace or rebuild any of your belongings without paying any extra money.
4. Extended Replacement Cost Insurance Policy
In the unfortunate event that your home is completely destroyed, you may go over the limit of your replacement cost insurance policy. If this happens, insurance will not pay more than the limit of your replacement cost policy, even if it will cost more to get your home back to how it was.
To avoid this, most insurance providers offer extended replacement cost insurance policies. If you purchase a Replacement Cost Insurance policy on your home you will automatically be provided with extended replacement costs. If rebuilding your home costs more than originally estimated, your insurance holder will provide coverage from 125% to unlimited the original estimate.
This means that homeowners do not have to worry about increased costs due to a shortage in labor or materials, rise in inflation or any added costs due to law changes that must be abided by.
5. Cash Out Settlements
Some insurance providers offer replacement cost insurance policies that allow you to receive a full payout without replacing the item. This means they will pay you out and you can keep the payment to spend as you please.
Bear in mind that not all policymakers offer this cash-out settlement option and it is more expensive than a typical replacement value policy premium.
6. Required by Some Mortgage Carriers
Before you are approved for a mortgage, a lot of loan carriers will require you to have replacement cost homeowners insurance. This is to ensure that you will continue your mortgage payments in a worst-case scenario.
It is especially important for homeowners to get a replacement cost insurance policy if you are in a lot of debt or do not have much savings. In the event that your home was destroyed by fire or natural disaster, a replacement value policy would protect you from being homeless and unable to pay back any loans.
What Information Might Be Required?
If disaster strikes and you need to replace your items or rebuild your home, you need to be aware of what is required of you when you make a claim to guarantee you receive full compensation.
As long as you have a replacement cost insurance policy you should expect full compensation when replacing contents that were insured. All you need to provide your insurance policymaker with is:
- Descriptions of your items with precise makes and models if applicable
- The date that you originally purchased each item
- The price you initially paid for each item
- The replacement cost of the item today
- Any photos proving the condition of the items
It’s a hassle trying to find a receipt for every item in your house that you want to replace, but it is important if you want to get fairly reimbursed. It is crucial that you keep the receipts of any high-ticket items you buy, like TV’s, sound systems or kitchen appliances. Get into a habit of having your receipts emailed to you to ensure you have a digital collection when disaster strikes.
Insurance providers have their own criteria you must follow when you make a claim. Be sure to ask your insurance provider what guidelines need to be followed and what questions you need to answer in the event of a claim. Do this before you make a claim to help you be prepared and ensure you get fair compensation for your items.
How much will I receive in a successful Replacement Cost Insurance Settlement?
In the unfortunate event of losing your home or contents, you need to make an insurance claim to get reimbursed for what you lost. Figuring out how much you are eligible for receiving is crucial to ensure you get fairly reimbursed.
For items like your personal home and contents, it’s relatively easy to estimate the replacement cost. Choose any item in your house, take your fridge for example and look for the same brand or model online, (if it is no longer available then look for its closest match).
Replacement cost of a house is not the price that you paid for it when you purchased it. It is a number calculated by assessing the cost of material, labor and design costs.
Other valuation models depend on the housing market and other big picture factors, which can lead to an inaccurate valuation of replacement cost.
Figuring out the replacement cost on your home is not as straightforward as that. If you lose your home to natural disaster or a fire and need to rebuild, you need to work out the cost of materials and labor to rebuild your home. A home’s replacement cost is only the cost of rebuilding, and has nothing to do with the land the house sits on.