Regardless of whether you are an owner or renter, you have the following three options when it comes to payment under your insurance policy. Each level comes with different benefits and costs so it’s important to discuss with your agent the option that works best for you and your family.
- Actual cash value.
This type of policy pays to replace your home or possessions minus a deduction for depreciation. - Replacement cost.
The policy pays the cost of rebuilding/repairing your home or replacing your possessions without a deduction for depreciation. - Guaranteed or extended replacement cost.
This policy offers the highest level of protection. A guaranteed replacement cost policy pays whatever it costs to rebuild your home as it was before the fire or other disaster–even if it exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally won’t cover the cost of upgrading the house to comply with current building codes. You can, however, get an endorsement (or an addition to) your policy called Ordinance or Law to help pay for these additional costs. A guaranteed replacement cost policy may not be available if you own an older home.Some insurance companies offer an extended, rather than a guaranteed replacement cost policy. An extended policy pays a certain percentage over the limit to rebuild your home. Generally, it is 20 to 25 percent more than the limit of the policy. For example, if you took out a policy for $100,000, you could get up to an extra $20,000 or $25,000 of coverage.Even though a guaranteed/extended replacement cost policy may be a bit more expensive, it offers the best financial protection against disasters for your home. These coverages, however, may not be available in all states or from all companies.
