Does your homeowners insurance provide actual cash value or replacement cost coverage if you suffer damage or a total loss to your home and it's contents? The truth is nearly 60 percent of all homeowners are seriously underinsured. There are several things to consider but the biggest one is which type of coverage your policy offers.
Replacement cost coverage calculates the cost to repair or replace your home with one of comparable size using the same quality of materials as your current home and at today's cost. Many companies are even allowing you to purchase guaranteed replacement cost coverage which allows you to get as much as 25% more than the estimated cost to rebuild. This type of coverage is the best at ensuring that you will be back at the position you were prior to the damage to your home. All with minimal out-of-pocket expense to you.
Now, lets look at actual cash value (ACV) insurance. This type of coverage uses the same calculation of replacement cost but then subtracts depreciation. Now different parts of your home depreciate at different rates and it is a complex calculation. So, I won't pretend to be an expert at that. But let's say that your 40-year-old home that you re-roofed 12 years ago with 25 year shingles and updated with a new furnace and water heater 8 years ago along with various other improvements you have been able to make burns to the ground. What is the actual cash value of your home?
I don't know either but, one thing is certain. It is less than what it will actually cost you to rebuild which leaves you with a couple of options:
- Build a nice, cozy home that is a lot smaller than the one you lost using the money you do get from your insurance company
- Build one similar in size and amenities to the one you lost and pay thousands of dollars out of your savings, retirement funds, or loans from friends or family.
One thing that should not be an option at that point is keeping the same agent.
A recent survey conducted by the National Association of Insurance Commissioners (NAIC) found that 64% of the homeowners who responded said that they were insured for replacement cost, 24% said ACV, and worst of all, 12% had no idea. Veteran and new agents alike make this mistake and it could cost you thousands. Go home tonight and review your declarations page of your homeowners insurance policy to see which coverage you have. You'll probably sleep better....maybe...
