Sometimes, clients simply want to purchase as much home insurance as required by their lender. This is usually enough to cover the mortgage of the home, but many homeowners don’t realize that this may not be enough to protect their home completely.
Explaining Total Replacement Cost Value
The total replacement cost value of a home is not the same as the mortgage or the home’s market value. Instead, total replacement cost value refers to how much it would cost to completely rebuild the home after a disaster, including building and material costs.
There are different ways to calculate this amount. A homeowner may have the home professionally appraised, or they may use online calculators to discover the total replacement cost value of their home. Homeowners should keep in mind that this amount should also include the value of attached structures, permanent fixtures and amenities. This includes fireplaces, stoves, ovens, permanent light fixtures and more.
Updating a Home’s Total Replacement Cost Value
Simply knowing the home’s total replacement cost value isn’t enough, however, because this value can change. Updates to the home, its amenities or fixtures can change the total replacement cost value of a home. If the value of the home changes and the updates are not reflected on the home insurance policy, the homeowner could find themselves with gaps in their coverage when it comes time to file a claim.
For example, say a homeowner updates their countertops during a kitchen remodel. While away on vacation, an electrical fire burns down the entire home, including the newly remodeled kitchen. If the homeowner did not update their insurance policy to reflect the changes before the fire, certain parts of the kitchen may not be covered under home insurance.
This also applies to personal belongings. If a homeowner makes a new, expensive purchase (such as an expensive television), they will want their policy to reflect that purchase in order to receive compensation for damages or loss.
Replacement Cost Value and Belongings in Home Insurance
Replacement value may also apply to the homeowner’s personal belongings, although it works somewhat differently. It is important for homeowners to consider what items they want to consider and how much those items are worth. Certain expensive items, such as jewelry, furs, art and electronics, have limited coverage under basic home insurance policies. A homeowner may need additional policy floaters to cover these specific items.
Homeowners may calculate the replacement cost value of their belongings by keeping receipts or looking up the current value of the object. Clients should be careful about what type of policy they have, however. Make sure they know that there are two options when it comes to personal belongings coverage, along with the upsides and downsides.
An actual cash value policy provides compensation for loss of or damage to the homeowner’s personal belongings while accounting for depreciation. This means that as the value of their belongings drops, so does the amount of compensation they may receive. For example, say a homeowner purchases a laptop for $1,000. Five years later, the value of the laptop has depreciated to $500. When the laptop is stolen and the homeowner files a claim on this type of policy, they will receive closer to $500 than $1,000.
A replacement cost value policy provides compensation for loss of or damage to the homeowner’s personal belongings without accounting for depreciation. This means that even if the market value of the item goes down, this home insurance policy will replace it with one of equal or similar value as it was originally purchased. This type of policy is generally more expensive, but it is also more likely to allow a homeowner to replace their belongings in full after a disaster.
Deductibles on both of these policies are adjustable depending on the client’s needs. A higher deductible can often save money on monthly premiums, but it also means the homeowner will have to pay more when it comes time to file a claim.
Do Clients Need to Cover the Total Replacement Cost Value?
In some cases, clients will not want to (or will not be able to) purchase enough insurance to cover the total replacement cost value of their home. This is not a problem, so long as they purchase at least <80% of their home’s total replacement cost value> in home insurance. Carrying less than this amount can leave gaps in a homeowners’ insurance policy and leave them paying more than expected after a claim.
Also Read: Detailing Home Insurance Claims and Compensation for Your Clients