Even if you know what type of homeowners insurance you have, how insurers assess the value of replacing your home and possessions might surprise you. Insurers use depreciation -- the loss of value of insured items over time -- to limit the amount that they must reimburse policyholders when losses occur. Policies differ from one company to another, however, so shop around before choosing a one.
Home insurance policies fall into two basic categories. Cash value -- the least expensive option -- gives you up to the stated dollar amount on your policy in the event of a loss. Replacement-cost policies promise to rebuild your home in accordance with policy limits and terms. Not all companies offer the same policies countrywide, and areas at high risk for fire or other natural disasters sometimes see insurers pull out of the local market.
Older Not Better
Just because your cash-value contract has a specific number associated with it, you don't automatically get that amount in the event of a total loss. Insurers reimburse you for the current cash value of your home and its contents. For a 12-year-old roof, for example, you get the roof's value in cash, rather than the amount it costs you to replace it. Your five-year old computer may work fine for you, but the amount insurers pay in case of loss could be less than the cost of a new one.
Depreciation by Default
When you have a replacement policy that guarantees coverage of the cost to repair your home and replace your belongings, you might assume you get all the money you need when a loss occurs. Some insurers only pay out a depreciated amount on certain items, though, as opposed to the full replacement cost, and hold on to the difference until you provide receipts as proof you made the repairs. Take the initiative, and don't assume that just because you signed a settlement check you're not entitled to more money, writes Michael Giusti on Bankrate.com.
Neither cash value nor replacement value policies cover you in case of flood or earthquake. The National Flood Center provides insurance for people in low-to-moderate or high-risk flood zones, as most private insurers don't offer policies that cover flooding. Earthquake insurance in active seismic zones often comes at a high price, with high deductibles.
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