Knowledge is your friend when it comes to making sure you have the insurance coverage you need. And whether this is your first time purchasing home insurance or your tenth, you’ll need to weigh your options–and consider how they’ll affect your bottom line–before you sign off on a new policy. Understanding the difference between market value coverage (often called actual cash value (ACV) coverage) and replacement cost coverage is a crucial starting place. And digging into the nuances of these options now could save you thousands if an accident happens.
Market Value vs. Replacement Cost Home Insurance Coverage: What’s the Difference?
It might seem like a subtle nuance, but there’s a huge difference between these coverage options, and the one you choose will dramatically impact how readily you’re able to bounce back from disasters.
Market Value Coverage: This type of coverage is designed to pay you the market value of your home in case of loss: the amount you’d be likely to get on the open market. This is a coverage option for the structure of your home and its contents, as well; these are separate topics and you’ll need to talk to your agent about how you want your personal belongings, and your actual home structure covered when you purchase your policy.
Replacement Value Coverage: This type of insurance almost always worth more than market value coverage because it ensures you’d have the funds to replace your home (if it were destroyed by a covered peril) or your belongings (if you chose this type of coverage for personal property, as well). A replacement value policy is more expensive, but it usually offers more robust protection.
Nuances to Consider When Making Your Decision
Choosing between these two major coverage types isn’t always easy. Make sure to ask these questions as you’re weighing your options.
What Does My Lender Require? If you’re purchasing a home through a mortgage lender, it’s likely that your lender will have some specific requirements for your insurance policy. Usually, they’ll require that your coverage is at least equal to the cost of the mortgage, and they may have other requirements as well.
How Much Is My Land Worth? If you purchase a replacement value policy, you won’t have to take into account the cost of purchasing a new piece of land–and that can dramatically affect the cost of the policy, especially if you live in an area where land is at a premium. Sometimes the foundation of your old home can be reused in case of a total loss as well, which can also help cut down on costs.
How Old is My Home? If you own a hundred-year-old home with hardwood floors throughout and/or detailed woodwork or masonry, replacement costs could be significantly higher than the market value of your home–and that could mean a very expensive insurance policy. Check quotes for both options when considering the possibilities.
What is the Cap? Even if you purchase a robust replacement value policy, there’s typically a cap on how much your insurer will be willing to pay for the rebuilding process. Ask about Guaranteed Rebuild coverage for a premium replacement value insurance policy that removes the cap and ensures your home will be rebuilt to your original home’s specifications, even if it costs more than expected.
Still not sure which option is best for you? Feel free to stop by one of our offices. Our agents are knowledgeable and experienced, and we’ll talk you through your options and get you the quotes and information you need to make a decision you can feel great about.