If your home were destroyed, is your insurance policy enough to rebuild and replace your possessions? (image via Delaware state fire school)

When was the last time you looked at your homeowner’s policy If you are like most homeowners, you looked at it when you bought it and then you filed it away in your filing cabinet or fireproof box for safe keeping.  But like the other insurance policies you have to protect you, you need to review and reassess your homeowners policy on a regular basis.  June is Home Safety Month which provides a great opportunity to review everything related to the safety and security of your home, including your homeowner’s policy.

Start by reading through your policy to make sure you understand all the terms and conditions and any exclusions.  Don’t hesitate to ask your insurance agent to explain anything that is unclear or answer any questions that come up during your review.  One of the most important things you need to understand about your policy is the type of replacement coverage that it provides.  This makes a big difference in determining the amount of coverage you need and explains how the insurance company will assign a value to your home and its contents if you experience any losses.

There are two primary types of replacement coverage, actual cash value and replacement value.  If your policy provides actual cash value for your losses, the insurance company will value your possessions and your home at the actual cash value minus any depreciation.  If your policy provides replacement value coverage, the insurance company will value your possessions and home at the current cost to replace them.  Understanding the difference between these two types of coverage is critical to understanding how much protection your homeowner’s policy is actually providing.

Let’s look at how the amount the insurance company would pay differs for the same loss under each of these coverage types.  There is a fire in your home that causes damage to the kitchen and the living room.  Both rooms have extensive damage and will require significant work to repair.  The fire destroys your stove, refrigerator, television, couch, and an antique desk.  Here is how the payout would differ.

If you have actual cash value coverage, the insurance company would use the value of the home to calculate the value of the portion of the house that was damaged.  Once that value was established, any depreciation would be subtracted from that value and that is the amount the insurance company would pay out for the damage to your home.  If your policy provides replacement coverage, the insurance company would get an estimate from a contractor on the cost to repair the damage and the payout would cover the cost of the repairs regardless of the value of the home or any depreciation.

The same process would be applied to the possessions damaged in the fire.  If your policy provides actual cash value, the current value of your stove, refrigerator, television, couch and antique desk would be determined and if appropriate, any depreciation would be subtracted in order to determine the payout.  If your policy provides replacement value, the cost to purchase comparable items to replace those that were destroyed would determine the amount of the payout.

As you can see from these examples, if your policy provides actual cash value coverage, you may not receive enough money from the insurance company to repair your home or replace your possessions.  Since most people don’t have the cash on hand to make up the difference in costs, most homeowners should consider having a policy that provides replacement value coverage.

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Homeowners Insurance

Is your homeowners policy enough to cover you in the event of a loss? (Image via PrimeImageMedia.com on Flickr)

There is no question that the volatility in the housing market in recent years has affected the price and value of almost every house in America.   Most homeowner’s have seen the value of their home drop, rebound a little, and then drop some more.   People everywhere are focused on keeping their homes or refinancing their homes to get more affordable rates.  All this change means it is time to take a look at your homeowner’s insurance in order to make sure you still have adequate coverage.  Many homeowners think their homeowner’s policy covers what they are expecting it to cover without really understanding how the kinds of economic changes we are currently experiencing can impact their coverage.  Take a few minutes to walk through your policy and make sure it still offers the coverage you need.

Here are some of the key components you need to look for to ensure you are covered no matter what comes your way.

1.     Replacement Value

Although the policy limits for your homeowner’s insurance policy are based on the estimated value of your home, the coverage you need is how much it will cost to rebuild or replace your home.  This means that a significant drop in your home’s value doesn’t necessarily equate to a decrease in the coverage you need.  It could be a big mistake to decrease your policy limit based on a lower assessment or appraisal.

Economic turmoil and inflation have taken their toll on everything we buy and building supplies are no exception.    This means that even though the value of your house has decreased, the costs to rebuild it have not.  In fact, it is very likely that the cost to rebuild your home is actually higher than it was as little as two years ago.  Check with your insurance agent to make sure your policy limit reflects a current estimate of replacement cost.

It is also a good idea to review the policy limit for replacing your personal property which is based on a percentage of the overall replacement value.  If your personal property would cost more to replace than the current limit, talk to your agent about increasing the limit or scheduling high dollar items to ensure they are covered.

2.     Improvements and Additions

If you have made significant home improvements or added an addition, the value of your home has changed and your insurance may need to change to reflect the increase.  Things like adding a bathroom, changing to a more eco-friendly heating system, or replacing the roof may increase the value of your home but more importantly, they may increase the replacement cost of your home.  Make sure you notify your insurance agent of these kinds of changes and verify that the policy limit will be enough to cover the improvements.

In order to make sure you have the protection you need, you need to review and update your homeowner’s policy regularly.  Remember that the policy limits need to cover the cost of rebuilding your home and replacing your possessions and therefore need to be based on current cost not retail value.  You don’t need to change your limits based on changes in the value of your house, but if building supplies and construction costs continue to rise, that may mean you need to make a change to your policy limits.

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