Nearly everywhere, the real estate market isn't as strong as it used to be. As a result, homes have depreciated, and the market is still trying to recover. The costs of building materials and labor have risen though. That's why our agents here at Value Plus Insurance recommend that homeowners don't just insure their homes for actual cash value.
Actual Cash Value
Let's say that a couple bought a residential lot for $50,000 and built a $200,000 home on it. On an actual cash value policy, homeowners will usually be paid for the loss of the home at the price they built it for, less depreciation. If they built the home for $200,000, and it depreciated by 25 percent, that $50,000 in depreciation has to come from somewhere if they're forced to rebuild. With increased costs of material and labor, that $50,000 loss is increased dramatically. They'll continue to grow when damaged and destroyed personal property is addressed.
To have your home replaced for the $200,000 that it cost you to build it, you'll need to insure the home for the full $200,000. If it appreciated, you'll need to insure it at its appreciated value. You'll still have increased material and labor costs to deal with.
Guaranteed and Extended Replacement Cost
These are the best alternatives for coverage. Guaranteed replacement coverage pays for the replacement of your home exactly as it was before it was damaged or destroyed by a covered risk. This protects you from increased material and labor costs. If you're concerned about the premium price for guaranteed replacement, ask us about an extended replacement option that gives you a 20 or 25 percent cushion above replacement cost.
Whether you insure your home for actual cash value, guaranteed replacement cost or extended replacement cost, there's still the issue of damaged or destroyed personal property in the house. Standard homeowners insurance policies insure those items at actual cash value. That means depreciation is figured into the value of personal property, so whatever you receive to repair or replace it will be dramatically less than what you paid for it. With proper replacement cost coverage for personal property, you're paid without factoring in depreciation.
We're independent insurance agents who shop your rates with many different companies. We want to see you fully covered in the event of a disaster. Call Value Plus Insurance in Burnsville at 952-435-0550 with any of your insurance questions.