Does your home insurance cover Replacement Value of the home or the Actual Cash Value?
As a homeowner, you should know what these home insurance valuation methods mean and how they affect you if you are ever faced with a loss. The difference can mean much to you if you are looking to receive the full value of your home, or the value minus depreciation.
Replacement Value Vs. Actual Cash Value
Replacement value refers to a method of valuation where the cost of your home's damage is replaced with materials similar in quality. The replacement cost to your home is made in whole, without regard to depreciation. This means that in the event of property damage, if the value of your home was $250,000 (which is the average value of homes in the United States according to Zillow.com) at purchase and has appreciated to $300,000, the replacement cost would be up to $300,000 — its full replacement cost.
This method of valuation differs from actual cash value (ACV). A home insurance policy that uses ACV for loss valuation would take the example above and pay up to $250,000 — the original cost of the home — and not $300,000. The method considers depreciation as a cost to determine what benefit is payable.
Which Valuation Method Is Better?
The valuation method you choose for your home insurance coverage should depend on your financial capabilities in the event a loss occurs. If your expectation is for the full replacement value of loss, a policy using the Replacement Value method is in order. If you have an alternate financial resource to go to in order to defray some of the repair costs (such as savings), you may consider the Actual Cash Value method for your home insurance.
ACV will result in lower premium payments for you. But it won't give you the full protection found under a home insurance policy using replacement cost.
This is where you need to ask yourself a question of what you feel is most important in your home insurance protection. Is it more important to save a few monthly premium dollars upfront in exchange for a lower benefit payout? Or is it more crucial to be fully protected? The choice is yours.
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