What is the difference between Replacement Cost and Actual Cash Value?
When you first purchase homeowner’s insurance and/or any other type of property insurance, you may have to make a choice between replacement cost option or actual cash value option. When it comes to understanding your homeowner’s/property insurance coverage it can be confusing. The reason it’s confusing is a customer really doesn’t understand the difference between replacement cost and actual cash value.
Most people think their coverage limits on their Declaration Page of their insurance policy is a good indicator as to how much they will be paid at the time of a claim. This isn’t the reality. The coverage limits on the declaration page is the maximum you could possibly be paid, not necessarily how much money you will receive.
What you should know so you understand how much you will get paid during a claim, and the difference between replacement cost and actual cash value coverage.
What is Replacement Cost?
Replacement cost is what it sounds like. It’s the cost of replacing something you own with a brand-new-version for e.g., your TV gets destroyed due to a fire, it’s the cost of buying a comparable model at the store or your couch burns to a crisp due to a house fire, it’s the cost of buying a comparable couch at the furniture store. It is easy to estimate replacement cost. You can look up the same brand and model online and see what it’s selling for at your favorite store.
Figuring out the replacement cost of your home and other buildings can be a little trickier. In calculating the replacement cost it’s the cost of the materials and labor required in order to rebuild the structure. (The value of the land beneath the building has nothing to do with replacement cost). Some polices that include replacement cost will provide money for you and your family to stay in a hotel while your home is being rebuilt.
Don’t confuse home replacement cost with what you paid for your home when you purchase it – replacement cost is what it will cost us to rebuild your home, based upon the cost of the materials, labor and design cost. Real Estate value can vary based upon your neighborhood’s desirability, how hot or stagnant the housing market and a bunch of other big picture factors.
A home’s replacement cost is the cost of rebuilding, pure and simple.
What is Actual Cash Value?
Actual cash value means exactly what it sounds like. It’s the depreciated value of an item of property at the time of the loss, opposed to what it would cost to replace that item with a brand-new-version.
Over time, the value of almost everything declines. Your TV slowly goes on the fritz. That couch slowly burns up. You pay way less for thrift store stuff than brand-new stuff for a reason.
The loss of value over time (called depreciation) can be estimated using math. Using a few different methods, economists and insurance adjusters figure out an item’s actual cash value based on its replacement value, its age and its “salvage value,” or the amount an item could theoretically be sold for at the end of its useful life.
The older something is, the less it’s worth – most of the time.
Certain rare items experience appreciation, or gained value, over time. This is especially true for art, precious metals and gems, firearms, fine jewelry and some antiques.
These items will need special treatment in your insurance policy to make sure their covered for their full value,
How Much Will You Be Paid for Your Claim?
To determine how much you will be paid on your insurance claim depends on three key factors.
- How accurately can you describe, document and show the lost value of your property? Have a home inventory of items (electronics, tools etc., write down serial and model numbers), keep copies of your receipts. The more documentation and proof you provide, the less likely you are to be at the mercy of the insurance company’s estimates.
- There are different types of property insurance policies, e.g., homeowner’s, condo, renters, commercial building, etc.… What type of insurance policy do you have? Depending on the type of policy you have will dictate the risks covered. The policy will cite exclusions and special limits for certain items. Special limits are not standard across all insurance companies. Companies that specialize in high-value homes might have higher special limits in the areas of jewelry, fine arts or even collectibles.
- The basis of claims settlement depends on your policy, how much you can expect from an insurance claim. Will the insurance company pay “actual cash value” or “replacement cost?” People who insure for actual cash value will never receive enough money in a claim to replace the items they lost. You can find the basis of claims settlement in your policy in small print. Homeowners are often disappointed in how they are paid when they don’t understand the meaning of insurance claim terms.
Did you know that cooling and heating are the leading causes of home fires and fire injuries? Did you know that November and December are the peak months for fire-related deaths? With the holidays right around the corner and the weather getting colder, now is the perfect time to review and practice fire safety.
Safety Tips When Cooking:
- Be alert; if you are sleepy or have consumed alcohol, don’t use the oven or stove-top.
- Stay in the kitchen while you are frying, grilling, boiling or broiling food.
- When simmering, baking or roasting, check the food regularly, remain in the kitchen while cooking and use a timer.
- Keep anything that can catch fire away from your stove-top.
Heating is the second leading cause of death. Heating safety tips:
- Keep all flammables, like paper, clothing, bedding, drapes or rugs, at least 3 feet from a space heater, stove or fireplace.
- Never leave portable heaters and fireplaces unattended; turn off heaters and make sure fireplace embers are extinguished before leaving the room.
- If you must use a space heater, place it on a level, nonflammable surface, like ceramic tile, not on a rug or carpet.
- Keep children and pets away from space heaters.
- When buying a space heater, look for models that shut off automatically if the heater falls over.
Other top causes of fire include smoking, electrical problems and candles. To minimize risks:
- Institute a “no smoking” policy in the house.
- Check all cords and replace any that are frayed or have bare wires.
- Switch to flame-less candles.
- Keep matches and lighters high and out of children’s reach in a locked cabinet.
Working Smoke Alarms are a Must
About three out of five deaths happen in homes with no smoke alarms or working smoke alarms. Smoke alarms are a key part of a home fire escape plan providing early warning reducing your risk of dying in a fire.
- Install smoke alarms on every level of your home, inside bedrooms and outside sleeping areas on the ceiling or high on the wall.
- Keep smoke alarms away from the kitchen, at least 10 feet from the stove, to reduce false alarms.
- Use special alarms with strobe lights and bed shakers for people who are hard of hearing or deaf.
- Test smoke alarms monthly.
Create and Practice a Fire Escape Plan
In the event of a fire, remember every second counts, so you and your family must always be prepared. Escape plans help you get out of your home quickly. Twice a year you should practice a home fire escape plan with your family.
Tips to consider when preparing this plan include:
- Find two ways to get out of each room in the event the primary way is blocked by fire or smoke.
- A secondary route might be a window onto a neighboring roof or a collapsible ladder for escape from upper story windows.
- Make sure that windows are not stuck, screens can be taken out quickly, and that security bars can be properly opened.
- Practice feeling your way out of the house in the dark or with your eyes closed.
- Teach children not to hide from firefighters.
How do you prevent freezing and bursting pipes?
When temperatures drop or even reach subzero degrees you are at risk of your pipes freezing or bursting. Pipes are most at risk in unheated areas such as basement, attic and garage. Once temperature start to drop and reach 20 degrees or below you should take necessary measure inside to keep pipes warm and water running.
Here are some steps in protecting your pipes:
- Keep garage door closed, especially if there are water supply lines in the garage.
- Open Kitchen and bathroom cabinet doors, this will allow warmer air to circulate around the plumbing, especially if your sink in on an exterior wall.
- Turn on cold water and allow it to drip from the faucet, allowing water to run through the pipes or even trickle will help prevent pipes from freezing.
- Keep thermostat set at the same temperature during day and night. During a cold snap is not the time to reduce your thermostat setting so you can save money on your heating bill.
- If you plan to be away during cold weather, leave your heat on in your home, and set no lower than 55 degrees.
- For the long term, add insulation to attics, basements, and crawl spaces. Insulation will maintain higher temperatures in those areas. To prevent drafts, seal cracks and openings around windows, doors, and at sill plates, where the house rest on its foundation.
Do you know how to thaw frozen pipes?
If you turn on your faucet and only a trickle of water comes out, you may have a frozen pipe. If you think you have a frozen pipe, be careful when thawing because if the pipe has already burst, the water will come flowing out and flood your home. If a pipe is broke, turn off the water at the main shutoff valve. If the water is still running and no pipes have burst, you can take the following steps:
- Tun on the faucet. As you heat the frozen pipe and the ice plug begins to melt, you want the water to be able to flow through. Running water through the pipe, even as cold as it is, will help melt the ice in the pipe.
- Apply heat to the section of pipe. Use an electric heating pad wrapped around the pipe, a hair dryer, or a portable space heater, or you can wrap pipes with towels soaked in hot water. DO NOT USE – a blowtorch, kerosene or propane heater, a charcoal stove, or any device with an open flame; the high heat can damage the pipes or even start a fire.
- Apply heat until full water pressure is restored. Make sure you check all your faucets in your home to see whether you have additional frozen pipes. If one pipe freezes, other pipes may too.
- Call a licensed plumber if you are unable to locate the frozen area, if the frozen area is not accessible, or if unable to thaw the pipe.
Happy New Year ‘2019’
It’s time to ring in a New Year. This is when people make resolutions but never really follow through with their resolution. We are entering “2019,” so what is your resolution or promise to yourself? Most people would recognize the following phrase:
- “This is the year I’m getting organized.”
- “This is the year I’ll stop smoking.”
- “This is the year I’m going to get into the best shape of my life.”
These are great New Year’s resolutions, but what about resolutions that provide you with peace of mind, secure protection for you and your family, and saving money on your insurance that could put money back in your wallet. Lancaster Insurance Center encourages you to take the time and review three simple “insurance resolutions” that could help you start 2019 off on the right foot.
- Check to see if you qualify for auto and home insurance discounts to help lower your premium. Saving a little money is always nice, and by speaking with Lancaster Insurance Center about any potential discounts is a great place to start. While premiums are calculated based on the level of risk an insurance company must take in order to provide you with coverage, there are steps you should take in order to reduce those risks. Here are few examples: “protecting your home by installing an alarm system in your home that will alert local authorities if there is a fire or a home intruder, this will aid in the prevention and mitigation of a fire or break-in. This will help in providing you with peace of mind and help by reducing your homeowner’s insurance premium. If you have teen driver that is starting to drive or already driving, speak with your agent about the “good student discount,” and all drivers may be able to lower their premiums by successfully completing the “defensive driving course,” if offered in your state.
- Make a home inventory list. We purchase home insurance for the primary purpose to protect from fire, or any other loss that may occur. Homeowner’s insurance is designed to protect you in the event of a loss or damage to your property. There are ways to reduce your exposure and drastically reduce your premium; we suggest you review your insurance thoroughly once every three to five years. Preparing a comprehensive detail home inventory list will help you at a time of a loss in replacing your belongings. Keeping accurate records such as, a list of all items in your home, receipts of items purchased with serial and model numbers, and pictures will ensure the less possible chance of having any issues or disputes between you and the insurance company during the claim process.
- Find and fix gaps in coverage. Not having enough coverage or the right coverage is a one of the worst experiences anyone could have during a time of loss. You file a claim, and then your claims adjuster informs you that you do not have enough coverage or any coverage for the loss. The purpose of homeowner’s insurance is to get you back to whole in the event of a loss or/total loss. It’s important to remember cutting coverage to save money now could only hurt you at the time of a loss. Lancaster Insurance Center will work with you to try and eliminate any of these situations from happening. There will come a time when your circumstance could change, and if you do not review and update your insurance coverage accordingly, you may find yourself with a gap in your insurance coverage or no coverage. If you have any high value items such as jewelry or collectibles make sure you have the proper coverage in case of a loss or you may not be covered under your homeowner’s insurance. Your homeowner’s insurance should offer you a coverage called “scheduled personal property,” this coverage is an add-on to your homeowner’s insurance. Did you know that flood insurance is not covered under your homeowner’s insurance? In the event of a storm such as Sandy or any other storm related where intense flooding may occur will not be covered homeowner’s insurance, even if your mortgage company does not require you to have it. If you want coverage for this type of loss you need flood insurance. Having a flood insurance policy could provide you with an important piece of protection and piece of mind knowing that you are protected in the event of a flood loss.
Remember, find and fix any gaps in your homeowner’s insurance coverage before it’s to late. Lancaster Insurance Center would be happy to sit down and review your homeowner’s insurance policy with you to identify where there may be potential gaps, and help you obtain the proper coverage to fill them.
It’s a New Year, a new start and a time to start over. Commit yourself to these resolutions could help provide you with peace of mind, more protection, and hopefully a little more savings that provides you with more money in your wallet this New Year.