Uncertainties are a fact of life. There’s no way of telling for sure what the future holds. One day everything’s fine and dandy; the next day, your house gets consumed by fire. And if that happens, will the homeowners insurance options you’ve selected provide the right coverage get you back up on your feet?
Home insurance is an essential part of homeownership. Without it, you expose yourself and your entire family to a huge financial risk, should disaster strike and cause costly damages to your home and belongings. Just as important as insuring your home, though, is making sure you have enough of it to rebuild and cover your losses. Else, you have to pay for the rest out-of-pocket, which can get very expensive.
Any insurance advisor would tell you that the most critical part of your homeowners insurance is the dwelling coverage. If the structure of your house sustains any damage or is totally destroyed by a covered peril, your dwelling coverage will finance the cost of reconstructing it. However, your insurer will only reimburse you UP TO THE LIMIT OF YOUR POLICY. This is why homeowners must pay closer attention to the amount of their coverage and ensure that they have sufficient protection in case of a total loss.
Homeowners Insurance Options for Dwellings
If you’ve been shopping around for home insurance, then you’ve probably heard agents throw the term “replacement cost” now and then. Insurance policies are typically offered in “actual cash value” or “replacement cost value.” And while most insurance companies would recommend a replacement cost value coverage to their clients, it’s wise to learn the fundamental differences between the two.
Actual Cash Value
An ACV policy is usually the least expensive insurance option for a reason. When you choose an actual cash value coverage, you almost always get less than the predetermined insurance amount, as the policy factors in depreciation costs.
The insurance company takes into account the age of your home, plus the wear and tear it has sustained over the years and deducts the depreciation value from the claim amount. So, while this option is cheaper, it could leave you footing for a large percentage of the rebuilding expenses.
Replacement Cost Value
The replacement cost of your home – or any property for that matter – is not determined by the property’s assessed market value, but by how much it costs to rebuild the same house from the ground up in the current economy.
With RCV coverage options, you don’t have to worry about any depreciating cost deductions. Your insurer will pay for the restoration of your home to its pre-damaged condition, but then again, only up to your dwelling coverage limit.
That said, if labor and building costs have skyrocketed over the years, which means the expenses for rebuilding your home are likely to shoot up as well, your standard RCV coverage may be insufficient for a complete reconstruction. And this is why you would want to add another layer of protection on your home by upgrading to either extended RCV or guaranteed RCV coverage.
Extended Replacement Cost vs. Guaranteed Replacement Cost
A lot of homeowners, especially first-time homebuyers, commit the mistake of insuring their homes for the amount they paid for it. While you should be careful not to over-insure, you also have to take into account inflation and market volatility when figuring out how much to insure your properties for.
Ideally, your dwelling coverage should exceed your home’s current market value. Endorsing your standard RCV to extended or guaranteed replacement cost value will take your home insurance to the next level.
Extended Replacement Cost
As the name implies, upgrading a standard RCV to extended cost valuation will increase its coverage limit. Most insurance providers allow clients to extend their coverage limit by 25%, while others may offer as much as a 50% extension.