|Is your home
really covered by insurance?
You expect your homeowners insurance policy to help
you recover from a catastrophe by providing you with enough cash
to replace anything damaged or destroyed in such an event.
However, read your policy carefully. You may not have
the protection you think you do.
"It is standard for most homeowners policies
to cover only the actual structure of the house -- not its contents
-- for replacement-cost value," says Don Griffin, vice president
of personal lines at the Property Casualty Insurers Association
Unless your policy specifically states otherwise,
your home's contents usually are covered only for "actual cash
So what's the difference?
Replacement cost or actual cash
When you file a homeowners claim, the insurance company calculates
how much to pay you by evaluating the cost to replace your property
with new property of the same kind and quality. But here's the critical
distinction: If your policy covers your personal property (your
home's contents) for its actual cash value, the insurance company
deducts depreciation from your personal property's overall value
before arriving at a figure.
Your check will usually be less, sometimes significantly
less, than the amount it will cost to restore, repair or replace
the damage or loss. However, if you have replacement-cost coverage,
the insurance company will pay what it costs to repair or replace
your damaged possessions at today's prices without deducting for
While actual-cash-value language is standard, most
insurance companies offer replacement-cost coverage as an option.
"Cost depends on the individual insurance company
and its experience in a given area," explains Griffin. "Generally,
replacement-cost coverage runs about 10 percent more per year than
actual-cash-value coverage, depending on the type of property. Renters
replacement-cost coverage, for example, can be about 20 percent
more than actual cash-value coverage."
"Going with actual-cash-value coverage is a way
to save some money at the front-end for the homeowner, if that's
the homeowner's key concern. However, in this day and age, most
agents recommend [replacement-cost coverage]," Griffin says.
You need to weigh the additional cost of replacement
coverage against the potential for additional cash outlay should
disaster strike. Without it, you will have to cover the gap between
the cost of replacing a damaged item and the amount the insurance
will pay toward that total value once it has deducted for depreciation.
The longer you own your house or personal property, the more depreciation
becomes an issue and replacement-cost coverage becomes more critical.
Replacement-cost coverage varies
Different insurers offer varying levels of replacement-cost coverage,
so you need to check your policy or with your insurer to see what
is covered in your area and what the limits are. Some companies
add maximums to replacement-cost coverage policies, to protect themselves
from overexposure in the case of loss.
For example, some insurers limit the replacement value
on roofs. "The insurance company wants to limit its liability
on old roofs," says Griffin. "Some people were waiting
to replace old roofs until after winter storms."