What is Replacement Cost in Terms of Home Insurance?

What happens if your home becomes a total loss? Perhaps a fire burns it down or a storm rips it apart. Your home insurance policy may cover the incident, but how much money will you get if they do? This is often dependent on what terms are written into your home insurance policy. Many people don't realize that there are several differences in the language in these policies that could impact how much you can obtain if your home is considered a total loss.

What's in Your Home Insurance Policy?

Take a closer look at your policy. Do you have replacement value coverage? Or do you have something else? This could define exactly what happens should your home become lost.

Actual Cash Value

One of the terms you may see is actual cash value. This often covers the contents of your home. It can cover the value of your belongings before they were destroyed. However, it does not cover what those items cost to replace them. For example, your old fridge may only be worth a few hundred dollars after depreciation, but it may cost twice that to get a new one just like it.

Full Replacement Value

Conversely, your policy may say you have full replacement value coverage. This means that when your property is lost, the insurer can replace or rebuild the property according to today’s prices. There is no depreciation factored into the policy. This type of policy costs more, but provides far more protection. In this case, the policy could pay for your losses based on the cost it would take to replace those items or the structure itself.

Guaranteed replacement cost is a secondary option or a higher value ad- on you can get. It ensures that if your losses exceed the level of coverage you have, that you remain covered. There are still limits with this type of policy, but they tend to be higher.

Before you purchase your next home insurance policy, it pays to have a discussion with your independent insurance agent. Find out what type of insurance you have, what happens when you need to make a claim and the amount of specific coverage you have. This can help ensure that should the worst occur, you can rebuild and start over with financial assistance.