Actual Cash Value vs Replacement Cost Katy Home Owners Insurance
Insurance is like anything else that you purchase. You can buy the coverage you need for an economical price if you are willing to sacrifice a few things. If you would rather have full coverage, you will need to spend a little more money. Whatever your choice may be, there is a Katy home owners insurance policy that will fulfill your needs. At RMC Insurance, we listen to you and also provide the best Katy car insurance policies to protect your family.
You can purchase Katy insurance for home owners for the actual cash value or the replacement cost value, but you may not know which one is right for you. This information explains the advantages of both so that you can make an informed decision. The example below may also be applied toward the Katy auto insurance policy that you are considering.
Actual Cash Value
The actual cash value, or ACV, is the economical choice because it requires that you pay the lowest premiums. That is because depreciation is taken into consideration.
As time goes by, the monetary value of your home may go down, and this is known as “depreciation.” If your home is destroyed by a covered loss and you purchased ACV coverage, your insurance agent will subtract your home’s depreciation from the amount of money that is required to rebuild your home as it was before it was destroyed.
For example, your insurance agent calculates that the replacement value of your home is $200,000 and the depreciation is $30,000. This would mean that your claim is worth $170,000. Your insurance agent will pay your mortgage lender first and then you will receive the remaining sum.
Two different problems may present themselves in the above-described scenario. First, if you do not owe your lender any money, you will not have enough to replace your home at $200,000. If you do owe your lender, you will have even less money available for rebuilding your home. Second, if you owe your lender more than $170,000, you will have to pay the difference between $170,000 and whatever you owe your lender.
Replacement Cost Value
The alternative to the ACV is replacement cost value coverage. Your insurance company would disburse $200,000 to you because depreciation will not be a factor. In order to purchase replacement cost value coverage, you may be required to accept a co-insurance clause. This could mean that you will need to insure approximately 80 percent of your home’s replacement cost. In this case, a $200,000 home would require $160,000 of coverage.
If you are only motivated to insure your home for $150,000, you may have to pay a penalty because you are underinsured. The penalty would require you to pay a percentage of the amount that was left underinsured as an incentive not to purchase coverage for less than the replacement cost value of your home.
Sometimes, replacement coverage is insufficient. In this case, you can add an extended replacement policy as an endorsement for extra replacement coverage. This increases the amount you would receive if it is needed.
In the example above, you may decide to purchase a 25 percent extended coverage endorsement. If your house is damaged beyond repair, you will receive $200,000 of replacement coverage plus $50,000 in extended coverage. You would be covered if the house costs more to rebuild than your agent originally thought it would. This makes extended coverage worth the extra money.
The Most Advantageous Choice
As can be seen from the example above, replacement cost value is the better option. If you are still unsure, your Katy home owners, auto, business, and life insurance agent with RMC Insurance can help you make the right choice.