Actual cash value. Depreciation. Extended Replacement Cost. Are you well versed in the terminology of homeowners’ insurance? If not, read on!
Depreciation basically means that your home loses value over time because the home ages and some items and systems within the home become outdated. Much in the way that your brand new Apple Watch won’t seem so cool five years from now.
Actual Cash Value vs. Replacement Cost
A 38mm stainless steel Apple Watch with white sport band currently costs $549.00. After a few years of wear and tear and technology updates, the value of your watch will decrease. Let’s say it’s valued at $200.00 in 2017. In homeowners’ insurance terms, the actual cash value of your watch in 2017 is $200 but the replacement cost is still $549.00 – the cost to replace your watch when depreciation is not factored in.
A history of homeowners’ policies
When homeowners’ policies were first coming into existence, they were based on paying out the actual cash value. Today, they are written on a replacement cost basis, meaning that they do not deduct depreciation.
The problem with this method is that when a person’s home is totally destroyed, the amount of their policy isn’t enough to cover the replacement of the whole property.
So, Guaranteed Replacement Cost policies were developed, which guarantee that in the event that your home is totally destroyed, the home will be replaced to its condition on the day before the loss. But, the problem with this type of insurance is that it proved to be prohibitively expensive.
In comes extended replacement cost
Extended replacement cost is a happy medium. If a person loses their home, the policy will pay more than their policy limit (usually up to 120-125 percent) to cover the replacement cost of the home. That way the insurance premium isn’t ridiculously expensive and in the rare event that someone needs to replace their home, they get that extra boost in coverage. This can be especially helpful if there happens to be an unexpected spike in costs at the time the house is being replaced.
Are you thinking it’s time to make a change in your homeowner’s policy? Don’t hesitate to check in with our keen home insurance specialists at Fusco & Orsini.