As a homeowner, making sure you are covered in the event of a total loss is a top priority. If a fire tears through your home, burns it to the ground, and neither the structure of the home nor anything inside is salvageable, this would be reported to your insurance company as a total loss. How you will be reimbursed for the claim depends on the type of coverage you have chosen. There are two main valuation methods when it comes to homeowners insurance—replacement cost coverage and actual cash value coverage. By understanding the differences and options available between these valuation methods, you can make informed decisions about your homeowners insurance and secure coverage that meets your needs.

Replacement Cost 

Extended Replacement Cost. This coverage offers a financial cushion in the event the cost of rebuilding your home is more than the estimated replacement cost. This can happen if a hurricane or snowstorm causes a lot of damage to a specific area. The cost of rebuilding skyrockets due to supply and demand, especially when there are supply chain issues as there have been lately around the world. You can purchase 25% or 50% extended replacement cost. For example, if you home is insured for $300,000, 50% extended replacement cost would give you an additional $150,000 (a total of $450,000 to rebuild).  

Guaranteed Replacement Cost. This alternative may come at with a pricier premium but provides the highest degree of security you will be made completely whole following a loss. This type of home coverage is the highest level one can have, as it guarantees the rebuild of your home regardless of the cost. It may not be available, or outside your budget, but it does give peace of mind to the insured, especially considering the cost of lumber and labor rates of today. 

Actual Cash Value

Rarely recommended however is actual cash value coverage. This only offers compensation for the depreciated value of your stolen, damaged or destroyed property. This value is determined by the age, condition and expected remaining useful life of your property. Under this coverage, you wouldn’t be reimbursed for the full cost of replacing your destroyed couch from the above example. Rather, you would be compensated for current market value of the couch, based on the condition it was in before the fire. That being said, even if you initially purchased the couch several years ago for $2,000, you might only be reimbursed $1,000 for your loss due to depreciation.

This form of coverage typically leaves insureds with reduced compensation in the event of a covered claim, though can be tempting as a way to save money on your policy premium.

Working with an independent agent from FBinsure ensures a thorough review of your insurance needs and the best coverage options to protect you, your family, your home and your future. For more helpful information, check out our blog page, and subscribe to our social media channels so you never miss an update.


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