Level of Home Insurance
Most home insurance policies do not cover 100% of the cost of your loss. The actual payment will depend on the level of home insurance coverage you have.
The least expensive and most common level of home insurance coverage is "actual cash value". This type of policy will pay the lowest percentage of your claim. The most expensive coverage is "Guaranteed or extended cash value". This coverage is not available for all types of homes.
Actual Cash Value - Home InsuranceActual cash value is what you would expect - you get the actual cash value of your building or belongings with your home insurance. What this means is that the home insurance company will calculate depreciation on your goods. Note that they will calculate depreciation on many items you would not expect them to - like jewellery.
When an aunt of mine had a very expensive ring stolen (appraised value over $7,000) the insurance company gave her only $5,000. Why? She had an "Actual Cash Value" home insurance policy. The home insurers calculated depreciation for the 5 years she had owned the ring - even though the price of gold over the same time period had increased significantly.
Now, in many cases, actual cash value may be sufficient. If so, just be sure to get a special endorsement or 'rider' for any item (like jewellery or antiques and collectibles) to which you would not want depreciation applied.
Replacement Cost - Home Insurance
Now, if you have this level of home insurance coverage, your home insurance company will pay the cost of rebuilding, repairing, replacing WITHOUT a deduction for depreciation.
You will pay more for replacement cost home insurance coverage. However, if you ever have to make a claim, you will at least get the full value of your item.
Replacement cost home insurance coverage has 'no surprises'. Whatever the value of your home or goods, you will get that amount.
Guaranteed or Extended Replacement Cost - Home Insurance
Guaranteed replacement cost is the 'Cadillac' of home insurance coverage levels.
Let's say your turn-of-the-century home burns to the ground. The Guaranteed replacement cost home insurance policy will pay to rebuild your home exactly as it was before the fire - even if it exceeds the policy limit. This even protects you if building materials surge in price after a disaster which affects a large area.
However, the guaranteed home insurance policy won't pay for upgrades required by changes to building code since your lovely home was originally built. In order to cover this possibility you would need a special endorsement called "Ordinance" or "Law" which will help to pay such costs.
Note that if you have an older home a replacement cost home insurance policy may not be available - precisely because of the costs associated with obtaining the same kinds of original materials. Older homes were often built with much higher quality woods and finishings than are standard today.
Extended replacement cost home insurance is an option offered by some insurers. In this case, the policy will stipulate a certain percentage over the replacement cost to rebuild your home. You would be looking at 20% to 25% more than the limit of your policy.
While these home insurance coverages give you the most protection, it is also true that they may not be available from all companies, in all states or for all homes. You will have to check in your area.
The home insurance option you pick greatly affects the cost of your policy. As you move from "Actual Cash Value" through "Replacement Cost" to "Guaranteed Replacement Cost" the cost of your premiums will go up and go up significantly. Remember: the home insurance company is playing the odds in it's own favor. If you raise the risk to them they raise the premium to you. It's that simple.
Read more general information about Home Insurance Policy, Condo Insurance and Renters Insurance. Read specifics about Structural Home Insurance, Home Content Insurance, Home liability insurance, Additional Liability Coverage, Title Insurance, Flood and Earthquake Insurance, and Living Expenses Home Insurance. Don't miss the sections about Home Insurance Savings, Types of Home Insurance Policies, What Home Insurance Covers and Level of Home Insurance for definite information you should know before you buy.