Congratulations, you’re on the way to becoming a new homeowner or maybe you are reviewing your home insurance coverage. Your home may be the most valuable investment you will ever make. It’s important you insure your investment properly and that you understand the difference between replacement cost and actual cash value. The F. A. Peabody Company (FAPCO) can assist you in that endeavor.
One of the most important decisions you will be making is your insurance coverage on your home and personal belongings. As a homeowner you are forced to confront the question of “which coverage do I select”. We will look at the two basic coverage choices, Replacement Cost or Actual Cash Value (ACV).
Replacement Cost
Replacement Cost coverage is somewhat self-explanatory. It’s your actual cost to replace an item with a new version, a replica, of your current item. For example, if your television gets fried, your replacement cost coverage will cover your cost of buying a new comparable TV. Whatever the cost of a new replacement item is, your insurance covers it.
Actual Cash Value
Actual Cash Value (ACV) coverage is the current value of an item you own, taking into consideration wear and tear, depreciation etc. It concerns the value of your item today, after age and use, rather than the actual cost of your replacing the item. Generally, excluding antiques and other such items that may appreciate in value, the more your item ages the less the value of that item. In the case of your home, ACV will pay you only the depreciated value of your home not the actual replacement cost. You have required minimum insurance limits with ACV coverage. It’s important you attain your limits. You should discuss these limits with your agent.
The Differences in Replacement And ACV Coverage
If you purchase replacement cost insurance, it will require a higher premium from you than ACV. However, you will be paid more in the event of loss to your home and belongings. In either case, whether replacement cost coverage or ACV coverage, the insurance company will only pay you for the amount of replacing like kind items. The insurance company will not pay the full amount to replace your mid-range sound system with a high-end sound system. Furthermore, replacement cost coverage is limited by your policy limits. This is why you may wish to purchase guaranteed replacement cost coverage. This coverage will replace your home exactly as before with no cost limits.
Tax Value
Tax Value is set by your tax assessor when comparing your property to similar properties in your area. Tax values differ from replacement cost values and ACV in several ways. When setting tax value the assessor compares your property to others in your community and what those similar properties are selling for in the market. Before the assessor sets the final tax value, other exemptions, for which you qualify, will be removed from the value of your property. The next step is to multiply that value by the “assessment ratio”, generally 80% to 90%, to determine the final value of your property for tax assessment purposes.
Tax values are not completed on an annual basis which can further distort the price of your property as market values change. If property values are appreciating quickly, your tax value may be well off the recent market value.
It’s important that you understand the above coverages and home valuation methods. They may affect your insurance claim in the event of a loss. Call your FAPCO agent with questions.