Replacement Cost in Homeowners Insurance
Always ask for replacement cost coverage on your homeowners insurance policy. With replacement cost coverage, you will get brand new items that match the features of what you lost. Without replacement cost coverage, you may get something off craigslist.
You have an old large sectional couch that is 10 years old that is destroyed in a fire. You carry replacement cost coverage, so your insurance company will replace it with a brand new sectional couch with similar dimensions to what was destroyed.
Let's say you save money upfront by deciding not to purchase replacement cost coverage on your home insurance policy. The default coverage on your plan will be Actual Cash Value. With actual cash value, when an item is damaged or destroyed, it is replaced with a similar used item of equal depreciated value.
Actual Cash Value: If a 10-year-old couch costs $2,000 new but only has a useful life of 20 years, you will only get $1,000 for the couch when you file a claim since the couch only had 10 years left on a 20-year life.
Depreciation on an individual item may seem small. However, when you apply a reduction to all of your property, it can reduce a $100,000 check to $30,000. Young Alfred always recommends replacement cost coverage for your house and belongings if it is available.
When is Replacement Cost Coverage Not Available?
There are a couple of scenarios where replacement cost coverage is likely not available:
- Vacant homes: DP-1 policy
- Older vintage home (built before the 1920s): HO-8 policy
- Particular mobile and modular homes
- Homes with older roofs (no updates in 20+ years)
- Homes in fire protection class 10 (more than 7 miles to the nearest fire station + no alternative source of water to put out a fire)
In these scenarios, some insurance companies still offer coverage but at actual cash value rather than replacement cost. If you don't fall into any of the categories above, you should demand replacement cost on your coverage!
I hope that helps!
At your service,