Texas homeowners are constantly asking their independent insurance agents at Insurance for Texans if their home insurance policy is Replacement Cost. One of the great things that has come with agents educating homeowners is that people understand that they want to have their home replaced if something happens! So what is Replacement Cost and why do I want it. Or is actual cash value ok?
Before we talk about the difference, let's establish when replacement cost or actual cash value comes into play with your Ft Worth Home insurance. Replacing or giving cash value is used in the process of claim settlement. Since this will be the amount of money that the insurance company will pay you for a catastrophic event at your home, people become very sensitive to how this is handled. In other words, this is a highly important item to understand! So what is Replacement Cost? Or Actual Cash Value?
When a claim is processed and settled, portions of your home will have deteriorated over time. A perfect example would be your roof. Your roof has a life span before it needs to be replaced due to old age. Similar to your automobile, as the items deteriorate the value goes down or depreciates. So if it is destroyed, how does the insurance company pay out? This is where you deal with replacement cost vs actual cash value.
If your policy is labeled as actual cash value, the item or items that have been destroyed will be paid to you on a schedule. The original value of the item will have a depreciation schedule applied to that value. What ever that remaining depreciated value is determined to be will be paid to you in a check. It is a fairly straightforward process in reality. That old roof we mentioned earlier is likely to be a small check after your deductible is removed from that amount as well.
If your policy is labeled as replacement value, you will actually get the item replaced with like kind. Even though your item may be old, you will get at least an equivalent item to replace it with. So let's go back to our roof that is old. If you have a 20 year asphalt shingle that is 14 years old, a replacement cost claim settlement would allow you to put a new 20 year asphalt shingle roof back on your home! That claim settlement process has some steps, but you will get the roof replaced.
So this begs the question, why would anyone ever choose actual cash value over replacement cost? This is going to come down to a handful of factors including age/condition of home, construction methods used in the home, cash flow needs, and sometimes just preference.
- Age/Condition of Home - If your home is in need of great repair or rehabbing, some companies will not offer replacement cost to begin with. If your home is historic in nature, the cash value may be significantly higher than the actual cost to replace it. That means you may be better off protecting it that way.
- Construction Methods - Home construction methods have changed over time. In Texas, we generally don't see pier and beam any more. We don't use aluminum wiring anymore. Have you seen a plaster wall lately? Because of these items, actual cash value may be a better value both in premium and benefit due to the changes in construction.
- Cash Flow Needs - As a general rule of thumb, actual cash value policies are easier on the pocket book from a premium stand point. It makes a way to lessen the premium burden if you understand the drawbacks on a claim settlement situation.
- Preference - Property investors with a large portfolio of homes may want to lessen the cash flow required knowing that the diversification of risk locations means that the likelihood of a total loss across their entire investment is very low. They also typically have the reserves to address problems without making a claim and use the premium savings to strengthen those reserves.
Now that you have a better understanding of the difference between actual cash value and replacement cost, you can have a conversation with your local independent insurance agent around how to use them to properly protect your home and it's contents. If you have questions about your Burleson Home Insurance or any other insurance, schedule a time for a review with Insurance For Texans to get answers!