What Is Replacement Homeowners Insurance?
If you own a home, then you were required to purchase a homeowners insurance policy to be eligible for a mortgage. Most buyers go for the lowest cost insurance, HO1 or HO2. These policies are limited to a specific cash value amount. Before you get locked into a policy, make sure you know you are getting the coverage you need.
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Defined
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Replacement homeowners insurance covers the entire cost of replacing your home if the house is destroyed. Replacement cost represents the amount of money it would take to rebuild it out of the same or similar materials. In the same way, if the house is damaged the coverage entitles you to the amount of money it would take to rebuild that part of the house without deducting any money for depreciated value.
What's The Difference?
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Unless the homeowners' policy specifies that the property is covered for replacement value, the coverage is only for actual cash value. Also called fair market value, that amount represents the cost to replace the home minus depreciation. Although it entitles owners to a lot less money in the event of an accident or disaster, this type of coverage cost 10 to 15 percent less on average.
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History
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Back in the late 1950s, homeowners insurance drastically changed when the industry needed a single comprehensive policy to cover the house, contents and liability. This meant the standard package policy now had two components: property insurance and personal liability. Today more than 900 U.S. insurance companies write policies, 80 percent of which are based on the same form, which provides coverage for all risks except those excluded by the policy—most commonly floods and earthquakes.
Considerations
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According to the Insurance Information Institute, major insurance companies such as Allstate, Farmers and State Farm have discontinued or are getting rid of replacement homeowners coverage. Chubb is one of the few large insurers in the U.S. that still offers guaranteed replacement coverage. The coverage has been replaced with cash-value policies. The institute suggests that you carefully examine your current policy and call your agent to make sure it covers your costs in today's market. Also inquire about an inflation-protection endorsement, which automatically increases coverage based on inflation.
Discounts
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Many insurance companies give a discount of 10% or more to their customers that maintain other insurance contracts under the same roof. Consider bundling your insurances with the same company. You may end up saving on two annual policy premiums. According to Investopedia.com, you could raise your deductible to lower your premiums. The only problem there is you will have to cover the cost of small repairs such as broken windows or leaky pipes.
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References
- Photo Credit old building image by Igor Murtazin from Fotolia.com
