What Type Of Structural Coverage Method Should You Choose With Homeowner's Insurance?

Posted on: 19 January 2021

When you purchase homeowner's insurance, the agent will ask you many questions to gather the right information for your quote. One question they might ask is about the type of coverage method you want for your home. You can typically choose from three options. Here is an explanation of the three options and their differences.

Actual Cash Value

The first option is an actual cash value (ACV) method. This method results in the lowest costs for home insurance, but it also yields the least amount of coverage. When your policy uses the ACV method, you will receive compensation for your home based on its actual value. If you lose your house to a fire, you must file a claim. The insurance company will calculate the actual value of your house based on the materials in it. For example, imagine the value of the drywall in your house. It might have cost much less per sheet when they built your house than it costs today. You will only receive the actual value of the building materials and not the amount it costs to build it today.

Replacement Cost

The second method is replacement cost, and this method is the most common. With replacement cost, your insurance company compensates you for your losses based on the amount it estimated it will cost to rebuild. If you lose your home to a fire, they will estimate the costs to rebuild your house, and this is the amount you receive from your claim. If the rebuild exceeds this amount, you are required to cover the difference.

Guaranteed Replacement Cost

The third option you can choose is guaranteed replacement cost. Of all three options, this one costs the most and offers the most protection. Guaranteed replacement cost provides you with all the money that it actually costs to rebuild your house. Even if rebuilding costs more than originally estimated, the insurance company will cover the excess costs. While you will pay a premium for this coverage method, it is often worthwhile. You can have peace of mind with this coverage knowing that you have enough coverage to rebuild your home no matter what.

If you need to buy a homeowner's insurance plan, you might want to think about these options before buying it. While you can save money by choosing a policy that offers the ACV method, you will not have as much coverage. You can learn more about these options by speaking with a home insurance agency, such as Illinois Insurance Center Inc.