Replacement Cost vs. Actual Cash Value

What type of policy should you ask for? That depends upon your personal situation. Generally, you should insure your home for 100% of its value (including its contents) with a replacement cost policy. Then, if your house costs $100,000 to rebuild from the ground up, that’s what insurance would pay in the event of a total loss. Likewise, if shingles are blown off the roof or cabinets are damaged by fire, no depreciation would be deducted even if the damaged property is used and worn. If you are insured for actual cash value, you will pay less for your policy, but you may not receive enough money to replace your damaged property. Instead, you will receive the amount your property is worth at the time of the loss – its cost minus depreciation for age and normal wear and tear. Some forms of property, such as fences, awnings and swimming pools, are usually settled at cash value. So is personal property such as appliances, furniture and clothing, unless you specifically purchase replacement cost insurance. Ask yourself the following questions to decide how much insurance you may need:

How much will it cost to replace my home today?

Ask an appraiser, builder or your insurance agent for an estimate. If you make drastic improvements to your home, such as remodeling or building a deck, you should update your appraisal and coverage to compensate for the increased value.

Am I protected for inflation?

Many companies automatically adjust your premiums upward to cover the rising cost of replacement. Otherwise, you should review your policy once a year to see if you still have adequate coverage.
Am I planning any additions or renovations? Adding a family room or renovating a basement will increase the value of your home and the amount of coverage needed.

Is the value of my personal property fully covered?

If you have many valuable possessions or have recently acquired new belongings such as stereos, televisions, computers, cameras and musical instruments, you may need to pay for increased coverage. Ask your insurance agent if you are covered for specific items of value. If not, consider purchasing extended coverage to protect jewelry, furs, silver and the like.

Do I need any optional coverage?

Some losses are specifically excluded in all policies, such as those resulting from floods and earthquakes. If these are a danger in your area, you may want to obtain additional or separate coverage.
Do I have an inventory of my personal belongings? Complete the room-by-room inventory at the end of this booklet, listing the approximate value of your possessions. Keep the completed list in a safe place outside your home, such as in a safe-deposit box or at your office. Photograph or videotape each room, if possible, and keep this visual record with your inventory.

What If I Live in an Apartment or Condominium?

If you own a condominium, the condominium association may pay for the insurance protection on your building, as well as liability protection if anyone is injured in common areas. You may need to buy your own liability insurance. Read your association’s policy carefully to determine if you are adequately covered, then purchase additional protection if necessary. If you rent an apartment or house, the owner’s property and liability are covered by his or her insurance, but your property and liability are not. You may be held liable, as well, for damages to the owner’s property done by you. You can purchase insurance for your personal possessions as well as liability protection under a renter’s policy.

What If I Rent Property to Others?

You should have a separate policy for dwellings you rent to others. Insurance will protect the property itself as well as any of your personal belongings at that residence. You also need business liability and medical coverage for anyone who might get hurt on your property as a result of your property or action. Ask your insurance agent for details on these coverages.