What will your homeowners insurance cover?
Consumers home loansLearn more
Understand the difference between actual cash value and replacement cost to make sure you have the coverage you need.
Homeowners insurance policies spell out the details of coverage and it’s worth taking the time to understand the terms. Make sure you know the difference between actual cash value and replacement value to make sure you have the coverage that you want.
Actual cash value
Let’s start with actual cash value. This is calculated by subtracting the depreciation of an item from the price a new item. Depreciation is based on the item’s expected lifetime. For example, a TV may have a useful life of 10 years. Each year, its value decreases by 10%. If the original purchase price was $1,000 three years ago, today the value would be $700.
If your homeowners policy specifies replacement cost, it means you’re covered for the value of a brand new item.
For the home itself, replacement cost is usually standard. This means if the building is destroyed, the policy will cover the cost of rebuilding a similar home. This figure may be lower than what you originally paid to buy or build your home. That’s because part of the initial price included the land your home sits on. Conversely, the replacement value might be higher to reflect appreciation in home prices since you bought or built.
Read your policy thoroughly
Personal property may be treated differently than structures. Some homeowners insurance policies only cover the actual cash value of items that are lost, stolen or damaged.
For example, if a homeowner whose coverage is for actual cash value of personal property suffers a fire, and all the furniture is five years old, the insurer will only reimburse for the value of used furniture. If the useful life of furniture is 10 years, this homeowner will only be reimbursed for 50% of what it costs to replace the furniture.
The gap between actual cash value and replacement cost can be significant.
If the homeowner has replacement cost coverage, they would be insured for the price of new furniture no matter its age.
If replacement cost is not standard with your insurer, for an additional premium you can purchase it. For many homeowners, this slight increase in premium is worth the peace of mind knowing they could replace their home and belongings if a mishap or disaster strikes.
Also, look to see what your policy doesn’t cover. For example, jewelry over a set amount may not be covered. Items like antiques or autographed sports memorabilia that appreciate may not be covered for their full value. However, you may buy an additional rider to cover these items.
If it’s been a while since you’ve reviewed your homeowners insurance, here are five things to review on your policy. And, one of your benefits as a Consumers member is access to insurance expertise through our partner, Nulty Insurance. Visit the Nulty website or call Michelle Hostutler at 269-488-0324 to get answers to your homeowners insurance questions.
Consumers helps more than 1,000 members finance land, first and second homes, and home improvement projects each year. When you need a mortgage or home equity line of credit, call us at 800-991-2221. We’re here to help you get the home of your dreams!