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All homeowners want to pay the lowest premium possible for the maximum coverage in the event of a loss. Whether you are insuring your first home or are just interested in learning more about your current coverage, it is important for homeowners to understand their coverage options. Do you know the difference between replacement cost vs market value coverage when it comes to homeowners insurance?

There are two main methods insurance companies use to calculate the amount they will reimburse homeowners policyholders after a loss:

Replacement Cost

Replacement cost is the cost needed to repair or replace your entire home with the same or similar materials and current methods if it were destroyed. If your home is insured for the replacement cost, depreciation is not taken into consideration. It is best to get a professional estimate done on the house to ensure you are covered for the appropriate amount and don’t pay for more coverage than you need.

Market Value (Actual Cash Value)

Market value, also known as Actual Cash Value, is the amount that the home would sell for in the current marketplace in its current condition. This type of insurance takes depreciation into consideration. Market value fluctuates and can be difficult to predict. Several factors that affect your home’s actual cash value include location, internal and external characteristics, and supply and demand.

Different insurance providers have various ways of calculating depreciation. One of the most common methods is to determine the item’s value in relation to its life expectancy.

For example, a sofa with a 10-year lifespan will depreciate by 10% each year. If you paid $1,500 for your sofa seven years ago, you can determine its actual cash value by calculating:
• $1,500 x 10% = $150
• $150 x 7 years = $1,050
• $1,500 – $1,050 = $450 actual cash value

Personal Property

These same options apply for your personal property coverage as well. For example, imagine that you bought a flat screen TV 4 years ago for $1,000. After a thunderstorm one night, you find your TV was shorted out, so you file a claim. If you have replacement cost insurance on your personal property, you will receive the same $1,000 (often half upfront, and the other half after proof of purchase) to replace your TV with the same or similar model. However, if you have market value coverage, you will receive the cost of the TV, $1,000, minus the estimated depreciation determined by the company, $400. This means you will receive $600 dollars for your TV.

In general, your home should be insured based on its replacement cost, not its market value, as the cost of building a home often exceeds market value. Since it is impossible to predict the future, it’s important to choose a policy that helps account for unforeseen circumstances. You should regularly review your home’s current replacement cost in case you need to update coverage, especially if you remodel. For a free quote or review of your policy, call us at 724-929-2300 today! Our knowledgeable agents would be happy to answer any questions you have.