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, assistant vice president of business and personal lines at the National Association of Independent Insurers.

Unless your policy specifically states otherwise, your home’s contents usually are covered only for “actual cash value.”

So what’s the difference?

Replacement cost or actual cash value?

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 depreciation.

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,” says 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.

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.”

Homeowners would file claims for storm damage, and the company would then replace the old, ready-to-be-replaced roof. Now some insurance companies limit the amount payable on replacing a roof, especially when the roof is over a certain age.

Other companies limit or exclude items in other categories such as business property, film, tapes, cassettes, records, art, memorabilia or collectors’ items. Check with your insurer to determine if you need special riders to cover your particular items.

Remember, you are insuring your home and your possessions — not your land. Think about what it would cost to rebuild your house and replace its contents, not what the market value of the house is.

Inventory your valuables

Calculate the value of your personal possessions by creating an inventory. Keep the inventory in a protected place outside your home such as in a safe-deposit box. If you have especially valuable items such as jewelry, artwork or computer systems, you may need additional insurance to cover them.

Written appraisals for jewelry, along with photographs, should be stored with your inventories. The insurance company will need this information if you have to file a claim. Also, if your house is broken into or destroyed, you will be able to identify missing items more readily by using a prepared inventory.

While videotape is great for documenting your large possessions, a written inventory is critical for noting small items. It’s best to inventory all of your items with a detailed description, including make, model, price paid, location and date of purchase. Keep photocopies of your receipts or other pertinent information with your inventories. Go through your house room by room and complete a written and visual inventory for each one.

Heidi St. Jean is a freelance writer based in Connecticut.

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