When searching for home insurance, you may hear the term "replacement cost value" in reference to your home and belongings. Many homeowners think this number is equal to the original selling price of the home, but this isn't true.
The replacement cost value of your home is the price it would cost to completely replace the home if it were destroyed due to a disaster. You can calculate this amount by adding up the value of your home's:
- Cabinets, fixtures and appliances
- Exterior finish
- Floors (per square foot)
Each home is different and has a different replacement cost value. Make sure to calculate the replacement cost value of your home before purchasing an insurance policy. It's recommended that you purchase 100 percent of your home's total replacement value in home insurance to guarantee that it can be rebuilt after a disaster. Be aware of the 80 percent rule in home insurance when purchasing coverage.
What Is The 80 Percent Rule For Home Insurance?
The 80 percent rule in home insurance is often elusive and misunderstood. Essentially, your home may not be completely covered unless you purchase at least 80 percent of your home's total replacement value in home insurance.
Say your home's total replacement value is $400,000. You purchase $250,000 in home insurance coverage, but then a tornado sweeps in and causes $200,000 worth of damage to the home. According to your home insurance policy, you should have purchased at least $320,000 in coverage, which is 80 percent of the home's total replacement cost value ($400,000). Instead of the $250,000 worth of coverage covering the $200,000 in damage, the compensation is calculated based on what should have been purchased. The actual insurance purchased ($250,000) is divided by the amount that should have been purchased ($320,000). In this case, the result is 78 percent — meaning the policy will only cover 78 percent of the damages.
Replacement Cost Value Of Personal Belongings
The replacement cost value of your personal belongings works the same way. Add up the value of the items you want to insure. Be aware that basic home insurance policies have limited coverage on certain items such as jewelry, furs and art. If you have expensive jewelry, you can purchase a jewelry floater which adds coverage. It's also important to understand what type of compensation your policy offers.
There are two main options for compensation for home insurance: Actual Cash Value and Replacement Cost Value.
What Is The Difference Between Actual Cash Value And Replacement Cost Value?
When you sign up for a home insurance policy, you sign up with the belief that your home and belongings will be replaced if an accident or disaster occurs. In some ways, this is correct. But many people misunderstand their coverage and are blindsided by the compensation they receive — or don't receive.
Actual Cash Value (ACV) provides compensation for the cash value of your lost belongings and accounts for depreciation. This means that as the cash value of your items go down, so does the amount of compensation you receive. This type of compensation typically means cheaper premiums, but it also means you likely won't be able to replace your items with an identical or similar item.
Replacement Cost Value (RCV) replaces your lost or damaged items with ones of similar or identical value and doesn't account for depreciation. For example, if your computer was worth $1,000 when you bought it and is now worth $500, RCV will replace your computer with one of similar value to $1,000. This type of policy is usually more expensive, but it makes it more likely that you can replace your items.
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