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Homeowners InsuranceYou probably know that insurance companies are good about reimbursing you when you have suffered a loss that falls within the parameters of your home insurance policy. But how much do you know about the mechanics of that reimbursement? What you might not realize is that your policy may entitle you to one of two different methods of calculating your insurance benefit. These methods include calculating for either replacement costs or actual cash value reimbursement, and there is a very big difference between the two.

Actual Cash Value

Actual cash value refers to the value of your property, generally acknowledged as fair market value. Fair market value is understood to be the amount that a fully knowledgeable buyer would pay for your property if he or she was given a reasonable period of time to decide to do so. It takes into consideration any depreciation within your home, changes in property value, and upgrades you might have made to improve its value.

Receiving the actual cash value for your home (assuming your home insurance policy limits permit that) is great for making you financially whole again and keeping your net worth in stasis, but it might not give you enough to rebuild your home on the existing property because your actual cash value might not be equal to the costs of rebuilding. This means you would either need to buy a new home or pay for some of the rebuilding expenses out of your own pocket.

Replacement Costs

Being paid replacement costs within your home insurance policy instead of actual cash values mean that you will be paid the cost to rebuild your home after a total loss, rather than being limited to receive only its actual cash value. In most cases, replacement costs can be paid when you’ve insured your dwelling for at least 80 percent of the full replacement cost of the property. This ensures that you and your family can replace your home by rebuilding on the same property, and not hurt your standard of living. Replacement costs may exceed actual cash value, but always remember that the benefit you receive will not exceed those in your policy’s limits.

If you already have a home insurance policy and just aren’t sure which reimbursement type you are entitled to, read your policy over. You can also call your agent or insurance company to find out for certain. If you are still shopping for home insurance, ask your agent about which benefit calculation method he or she would suggest.

Contact us today at any of our three locations for a free La Porte home insurance quote or Michigan City or Valparaiso in Indiana. 

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2 Comments

LARRY A.PETERS said...
If I had a barn, with one side blown off by the wind and gutter destroyed, why should the insurance company offer me Cash Value on the repairs. Can they apply a deductible and apply cash value to my barn?
THURSDAY, FEBRUARY 14 2013 4:50 PM
GIS said...
While we cannot speak to the specific claim you are referring to as we aren’t privy to all the details, there are many different reasons why a claim would be settled on an Actual Cash Value (ACV) basis. It’s important to note that insurance is meant to put you back where you were just before a loss. If your roof, for example, is 10 years old and you have a loss, a brand new roof actually puts you in a better position than you were. ACV will give you the value of your roof at 10 years old which includes 10 years of depreciation.

Some policies are written on an ACV basis. There can be many factors when a policy is written that would only give ACV coverage. Many home policies have the option to purchase Replacement Cost Value (RCV). This pays the difference between the depreciated value, or ACV, and the cost of the brand new roof. Sometimes a claim is initially paid as an ACV claim and once the repairs are completed an additional payment is made for the RCV amount. This is called Recoverable Depreciation or RCV Holdback. An insurance carrier isn’t required to pay you for the replacement cost unless and until you actually make the repairs.

TUESDAY, FEBRUARY 19 2013 12:48 PM

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