*photo credits: bogleech.com
One important detail to never lose track of when purchasing home insurance for your new home is how your insurance company will actually reimburse you should you experience a loss. There are two ways: replacement cost or actual cash value.
Actual cash value and replacement cost value are two different methods that can be used to calculate how much money you receive if your property is damaged, lost, or stolen.
What is actual cost value and replacement cost?
Actual cash value takes into account any depreciation that has occurred over time and replacement cost value is based on the cost to fully replace your property at current value.
Some new homeowners may choose to be insured for their homes actual cash value because this option is cheaper, but at the end of the day should they need to make a claim they will have to cover the gap between the cost of repairing the damage and the amount your insurance will pay.
Plus, the longer you own your home, the more depreciation becomes an issue and replacement cost coverage becomes more important.
For example, if your policy covers your home for its actual cash value, your insurance company will deduct depreciation from your home’s overall value to calculate how much they will pay you. This means that if your home is old it’s actual cash value is going to be significantly less than the amount it will cost to replace it. On the other hand, if you have replacement cost coverage on your home, your insurance coverage will pay what it will cost to repair or replace it without deducting depreciation.
How do you know which to buy?
New home owners should discuss the pros and cons with their insurance agent to find the coverage that is right for their home and budget. Always keep in mind, the better your home insurance coverage, the less money you will have to pay out of pocket should a disaster strike or accident happen.