08/25/2017
ROOF - Replacement Cost vs an Actual Cash Value - WORTH READING!
What is the difference between replacement cost and actual cash value? And which options are best for you?
When purchasing home insurance, it is extremely important to understand the difference between purchasing a replacement cost policy and an actual cash value policy, especially when it comes to roof coverage.
What is Replacement Cost?
A replacement cost policy is designed to repair damage done to your home, minus your deductible.
What is Actual Cash Value?
An actual cash value policy is designed to repair the damage done to your home, minus your deductible and minus depreciation.
For Example:
An example will best illustrate this difference. The Davis’s and the Johnson's are next door neighbors. Their homes are exactly the same size, built in the same year (2007), and have the exact same floor plan. Neither family has had the roof replaced, but the roof originally cost $15,000. The Davis’s have a replacement cost policy, while the Johnson's have an actual cash value policy.
One night in 2017 a terrible storm tears through their town, completely destroying the Davis’s and the Johnson’s roof. Both the Davis’s and the Johnson's have a $500 deductible, and both roofs incurred $15,000 of damage.
Replacement Cost Claim Settlement
To replace the entire roof, the Davis’s are only responsible for their deductible of $500. With replacement cost, the insurance company will pay the full cost of replacing the roof minus the deductible. Thus, the Davis’s homeowner’s insurance policy will cover $14,500 ($15,000 cost minus the $500 deductible) and the Davis’s will pay $500.
Actual Cash Value Claim Settlement
The Johnson's, on the other hand, aren’t quite as lucky. The roof on their home is 11 years old. When the roof was originally installed, it was worth $15,000. But now, due to weather and age, it’s only worth about $8,000. In other words, it has depreciated by $7,000. The Johnson’s insurance policy will cover the damage to their home, minus their deductible and minus depreciation.
The Johnson's need to pay $7,500 to repair their roof, a full $7,000 more than the Davis’s. The insurance company will only provide $7500 of the cost to the Johnson's.
With an actual cash value policy, the insurance company is only responsible for paying damage done to the home, minus the deductible and minus depreciation. Thus, the insurance company paid the $15,000 cost minus $7,000 depreciation and the $500 deductible, or $7,500.
Whether you want a replacement cost policy or an actual cash value policy is your choice, but it is important to understand the difference between the two policy types. An actual cash value policy is typically cheaper, but unless your home is brand new, there is a lot more risk involved. With the knowledge of what each policy is designed to cover you for, you are ready to make a well-informed decision when you buy home insurance.
Contact me today to discuss this very important topic and other points to make sure that you and your family are adequately covered for the best costs as well. My cell is 918-519-6950 or email me at [email protected] .
