It’s not easy to compare home insurance quotes. Replacement cost insurance is one of the coverage’s that can affect affordable home insurance premiums.
Many customers are confused as to what it actually covers, especially here in Florida where the endorsement for Replacement Cost on Contents coverage can be expensive.
What is replacement cost insurance?
Replacement cost basically means the amount it would take to replace the property with like property of the same quality and construction. No deduction is made for depreciation.
Remember that in insurance property means almost anything tangible.
Actual Cash Value
The opposite of replacement cost is actual cash value. This is when there IS a deduction for depreciation in the value of the property because of time or use.
A good example is a car. When you purchase it brand new on the lot it is worth what you paid, but a year and 12,000 miles later it is worth significantly less. Actual cash value only pays the depreciated value at the time of the loss.
The most important thing I have found is that you will never be happy with the actual cash value payment because it is never as much as you might think.
Replacement Cost for Buildings
Standard home insurance policies (HO3) cover the building for replacement cost automatically. This is because it would be difficult to put a used roof on a house. It’s one of those things that sounds ridiculous until you think about it.
There are some policies that cover the building at actual cash value. Sometimes they’re called a modified homeowners policy or HO8. It is extremely important that you understand that actual cash value quite literally means they are not going to give you enough money to rebuild the structure. There are a few situations where an ACV policy makes business sense, but very few and a lot of consideration should go into purchasing that type of policy.
Remember the policy will only pay up to the limit of insurance. You have to purchase enough limit to rebuild your structure because otherwise the maximum you can get is your limit of coverage regardless of the replacement cost.
Replacement Cost for Contents
You must purchase the replacement cost endorsement in order to cover the contents of a home.
Three good reasons to purchase replacement cost insurance for your contents are:
Your stuff cost more than you think to replace. Ties are a great example. You have 30 ties that were gifts over the years which are damaged in a fire. It is likely that you will need about $30 per tie to replace them. $30 x 30 = $900. So you will need $900 just to replace your ties. At actual cash value you might only get a fraction of that.
Furniture depreciates faster than you think. Though different items lose their value at different rates, they all lose value pretty fast.
Having enough to properly replace you items makes the process of getting life back to normal after a loss so much easier. It is never easy to have a fire or water loss, but not being able to put things back together makes the process that much harder.
Replacement cost is for the cost of standard materials and manufacturing. Anything that has a value above that like jewelry, furs, art, antiques, etc MUST be insured separately. There are quite a few limitations on the homeowner’s policy for those types of items. See Personal Articles Floater.
Replacement cost insurance is a good idea and is worth the additional premium to purchase the coverage.