![]() Replacement cost policies typically contain a co-insurance clause. ![]() The depreciated value of your home is not a factor in the settlement you receive from your insurer. Had you purchased replacement cost coverage, you would receive the entire $200,000 in the event your home burned down. For this reason, you would likely want to purchase a replacement cost policy. Homes are often built in large numbers in certain developments, which drives down the construction costs. This is why mortgage lenders often require replacement cost coverage on a mortgaged home!Ī home typically costs quite a bit more to rebuild at today’s prices than it did when you purchased it. This is not a good position to be in.Īlso note, if your ACV was $170,000, and you owed $180,000 on the mortgage, you would be stuck with a $10,000 bill owed to your lender. In fact, you’d be exactly $30,000 (how much your home depreciated since its purchase) short. You can easily see how you would not receive enough money to rebuild your $200,000 home. The lender gets their share of the money first. Depreciation is the loss in value of a piece of property over time. ACV is calculated as the replacement cost of your home minus depreciation. Had you purchased ACV coverage, you (and your lender if you had a mortgage) would be paid the actual cash value of your home at the time of the loss. How you would be reimbursed differs by the loss settlement method you agreed to and paid for: Let’s say, for example, your $200,000 home burns down as a result of an electrical fire caused by your clothes dryer. Remember, this works the same for almost any property damage, including physical damage coverage to your auto. Why? Let’s take a look at an example of how you will be reimbursed as a result of a homeowner’s insurance property damage claim. It is highly recommended that you purchase replacement cost coverage if your budget permits. If you want your personal items to be replaced at their cost to purchase new, you must request that separately. Replacement cost for your physical home and for the contents of your home is two different policy endorsements. The terms “replacement cost” and “actual cash value,” or ACV, are loss valuation methods insurance companies use to determine how much money they will pay out in the event of a covered cause of loss (claim) after any deductible is applied. ![]() Much like everything else we buy, insurance comes with a lot of options.Īnd just like everything else, you can go the economical route and give up a little quality and miss out on some bells and whistles, or you can pony up a few more bucks and get the whole shebang.
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