Your aim is to get the best insurance coverage for the best insurance rate possible. You have two basic options with replacement insurance:
In this article, we’ll compare the two in order to help you decide which option would be best for you.
Home insurance plans differ somewhat, but most of them do a pretty good job of covering the home. But when it comes to the personal items inside the home that is a different story.
These same plans include coverage of personal items, but will replace them at cash value. However, you can change your policy to include replacement value insurance instead. Let’s see what the difference is between cash vs replacement value:-
Replacement value is what it would cost at the time of loss to replace the damaged or stolen item with a brand new one.
Cash value is what it would cost to purchase a brand new item, but then they subtract what they think the item would be worth if you sold it used.
Many personal items depreciate, or lose value, like TV’s or computers, furniture, just to name a few. So you can see the advantage of going with replacement value coverage.
When it comes to your home, it’s a no-brainer to choose replacement value insurance. Labor and materials will surely cost more today than they did when you first bought or built your home. Replacement insurance will enable you to rebuild or repair at today’s costs.
Even if you think replacement value insurance is the way for you to go, it doesn’t hurt to know how your insurance company calculates depreciation. It’s rare that cash value would work for some customers, but you never know.
The method that companies rely on most has to do with the value of an item as it relates to an estimate of how long that item should be expected to be around.
Let’s take an example using some easy math. If you bought a couch for $2,000, and you can expect it to be around for 10 years, then your yearly depreciation would go down in “tens” or 10%. So every year, the actual cash value would decrease by $200. In five years, your couch would depreciate by $1,000, so the actual cash value would be $1,000.
$2,000 x 10% = $200
$200 x 5 years = $1,000
$2,000 - $1,000 = $1000 actual cash value
If you shopped for a similar couch today, what are your chances of finding it for $1,000? In fact, it’s very likely that the same couch would be more than you originally paid for it five years ago.
With replacement coverage, you can replace the couch at current prices, not the insufficient cash value.
If you go with the cash value option to cover your personal items, you have one other disadvantage. Even if your items go up in value – such as artwork, jewelry, autographed sports cards, balls or other items – that will not be factored in if you submit a claim.
Sure, you could purchase riders or endorsements to cover over and above what the insurance company allows. High value personal items insured in a $250,000 home could have a cap of $2,500. That amount may not even cover one item!
But if you add riders to your policy, you’re only going to increase your premium, spending more money in the long term. If you’re going to spend that extra money anyway, it would be more cost effective to go with replacement value coverage.
When you’re dealing with valuable personal items that go up in value, they may have some sentimental value, but most of all, they are investments. If they were ever stolen, and you only have cash value to protect them, you’re just flushing money down the toilet. Replacement value coverage will help to protect them.
You can always talk to your insurer to discuss available coverage options. If all else fails, you have the right to compare insurance rates.
If you own valuable jewelry, a firearm collection or artwork, ask your insurance agent about coverage options that will protect you from catastrophic losses in the event these items are damaged, lost or stolen.
Your choice of cash value coverage on your home might get you cheap insurance, but there are some things to consider.
If you are still paying on your mortgage, and you have cash value coverage, your lender might get a bit nervous about their now increased risk. They might demand that you purchase better insurance to protect their interests.
In the case of a damaged roof, cash value coverage will limit your reimbursement, especially if the roof is older. A new roof could cost $10,000 but the policy will only cover up to $7,000.
However, this scenario could still work out fine. Use the reimbursement to purchase the materials, and do the work yourself.
If you’re willing to do all of that to keep your premium lower, more power to you. But if your budget will allow it, getting replacement insurance will pay for itself over time and simplify things in case of a loss.
No matter what coverage you have at present, you can always change your policy to better suit your circumstances. And, as always, you want to get the best rate possible.
The first thing you need to do is take a look at your insurance needs. Write down everything you need to cover besides your home – artwork, collectibles, anything that has value or goes up in value.
Then make an appointment with your insurance agent. Discuss your concerns with him or her. Crunch numbers with them and see if you can improve your coverage without upping your premium too much.
Keep in mind too that it’s one thing to whittle some money off your monthly premium, but if you’re coverage is inadequate, what’s the point? So when you look at the different types of coverage, don’t just think about how much you would like to pay. Give a great deal of thought to what kind of coverage you’re getting for that price. It’s a matter of value for the cost.
If for some reason you don’t get the results you’re after, take some time to shop around. There’s bound to be at least one insurance company with a better rate – and possibly better coverage.