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Replacement Value Insurance Coverage Gives Homeowners Full Protection

By Mike Heuer

While some homeowners insurance plans provide actual cash value coverage for homes and other structures, others will pay claims based on the replacement cost. Replacement cost policies will pay the full amount minus any applicable deductibles to repair or replace a home or other structure damaged by a covered peril up to policy limits.

There are several ways for a homeowner to determine the correct level of coverage to ensure true replacement cost coverage will apply instead of having policy limits that are less than what might be needed to repair or replace a damaged or destroyed home and other structures. Obtaining estimates on the value of the home helps a great deal. Once obtained, the highest appraisal amount should be used to determine the insured value of a home. Local builders associations also can help a homeowner determine the replacement cost of a new or recently constructed home.

When using replacement value policies to protect a home with insurance coverage, it is necessary to keep abreast of changes in the home and other structures as well as market costs. If the cost of construction materials and labor rise, so will the replacement cost. In such cases, it pays to boost the policy limits to ensure the replacement cost will be covered in the event of damages or destruction.

Another situation requiring adjustments to the policy limits is when improvements or additions to a home and other structures are made. Adding a new room, upgrading a kitchen or bathroom, and adding a pool are among ways to boost a home’s value. But doing so also boosts its replacement cost, and that would require an adjustment in the coverage level on the homeowners insurance policy.

Regular adjustments in the policy limits for replacement cost homeowners insurance plans are critical for maintaining the proper level of coverage. Studies show nearly two-thirds of homes in the United States are undervalued on their insurance policies. That means many homeowners are vulnerable to financial loss even if they have replacement cost insurance policies in effect. If a home is damaged or destroyed, there could be a large deficit to be paid in order to restore damaged property, which also might have a mortgage tied to it. But many homeowners might choose to stay underinsured in order to shave some costs from their homeowners plans.

Because insurance providing replacement value of a home or other structure is more expensive than actual cash value policies, some homeowners might want to raise the deductible amount to make the monthly premiums paid to insure the home more affordable. In general, replacement value policies cost about 10 percent more than actual cash value policies.

While many homeowners insurance policies provide replacement cost coverage for the structure and its fixtures, the same might not apply for contents and personal belongings. Many policies instead will pay claims for contents and belongings based on actual cash value unless a replacement cost endorsement has been purchased. So if rare or highly valuable items re damaged or destroyed, such as jewelry, artwork or antiques, a standard homeowners insurance policy might not give full protection. But an insurance endorsement for replacement cost coverage would be an ideal solution.