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Types of Homeowners Insurance Coverage

If you're a homeowner -- or, about to become one -- it's critical that you know the type of homeowners insurance policy you have in case your house suffers damage from an event (e.g., fire, lightning, falling objects), or is burglarized and items are damaged or stolen.


There are three types of coverage:


1. Actual cash value

Also known as fair market value, this is the amount you would get to replace your home and possessions, minus any depreciation. This is perhaps the least expensive form of coverage.


Example: If you bought a bicycle five years ago for $2,000 and it was stolen, an insurance company will depreciate its value and compensate you for what that bike is worth today, which is likely to be much less than what you originally paid. Depreciation is determined by criteria such as age, category, and an insurance adjuster's assessment of the object.



2. Replacement cost

This will reimburse you for the full cost of repairing/rebuilding/replacing your home or possessions. An insurer will not depreciate the value of your home or possessions in this coverage.


Example: Remember that bicycle you bought for $2,000 five years ago? You will get the exact bike back -- or something of comparable worth at current market prices -- through replacement cost coverage.


3. Extended replacement cost

This is the highest level of protection and it pays a certain percentage over your policy limit -- usually 20-30 percent (e.g., your $100,000 homeowners policy will offer $120,000 in coverage). This is to protect against sudden increases in construction costs if there is a shortage of building materials after a widespread disaster (e.g., fire, hurricane). This kind of coverage is not offered everywhere and might not apply to older homes, but it is the best financial protection against disasters for your home.


If you are shopping for homeowners insurance, or have it already, your best choice would be "replacement cost" insurance. Or, if you live in an area where hurricanes and tornadoes are prevalent, it is wise to invest in "extended replacement cost" insurance. Most standard homeowner's policies cover your personal belongings on an actual cash value basis, so make sure you specify that you want to insure your belongings with replacement cost insurance, if you so desire.

By Diane Tuman

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