What Makes Replacement Cost Coverage Irreplaceable?

By Catherine Powell

The reason most people buy insurance is to make themselves whole again after disaster strikes.  Whether the disaster comes n the form of a fire, a theft, a broken pipe or an act of God is immaterial.  When something totals your car, a thief steals something you prize, or a fire burns your home or RV to the ground, most folks assume that their insurance will pay to replace what they lost with something of equal value, or give them the cash equivalent.  The problem is that it's not always how the story goes as you’ll discover in this week’s blog.

How much is your stuff worth?

When you bought that 82-inch Ultra HD TV last year for $1,500, you had no way of knowing that it was going to be stolen by a burglar.  You only felt as if you’d been robbed twice when your insurance company told you they were only going to give you only $1000 back.  When you protested, the adjuster explained to you that your compensation is predicated on the actual cash value of the item, which currently has depreciated your TV by 1/3 of its value.  I guess you’ll have to settle for a 70-inch model or pay the $500 difference if you want another 82-inch TV.  If only you’d known the difference between actual cash value and replacement value. 

Or maybe you just drove off the dealer lot in a brand-new SUV that you paid $45,000 for, only to be involved in an accident that totaled it an hour later.  While you expected to have to pay the $500 deductible to buy an identical SUV to replace the one that was wrecked, what wrecked your day was when your insurance company informed you they were only going to give you a check for $41,500, since the depreciation on your new vehicle amounted to $3,000 the moment you rolled it onto the street.  Too bad you didn’t opt for gap coverage that would have made up the difference.

What happens when your home sweet home goes sour?

When you bought your home, you made sure your homeowner’s policy had limits that would enable you to rebuild it were it to be destroyed in a fire or blown away by a tornado.  You even paid extra to get flood insurance in the off chance that a hurricane flooded your home.  But that was 10-years-ago.  Even though you still carry the same coverage, you haven’t adjusted your policy to take into consideration the cost of inflation, not to mention the $15,000 deck with outdoor kitchen you added onto your home recently.  Should a hurricane decimate your home, you’ll be dumbstruck when you come to find that the difference between what it will now cost to rebuild your home and what your insurer will pay you is going to be $40,000.  I hope you’ve been socking away the savings or are prepared to downsize to a smaller home. 

How can you make sure that your coverage is going to cover everything you own?

If you haven’t spoken to your insurance agent in a year or more, now is the time to pick up the phone to make a call.  Just as no one stays young forever, neither do the circumstances of our lives remain fixed.  As our incomes increase, so too do most people’s possessions.  To maintain an appropriate level of insurance coverage, you need to keep your insurance agent apprised of your income and acquisitions.  You also need to ask your agent if your homeowner’s policy is based on actual cash value or replacement value.  Last but not least, you’ll need to ask what the limits of coverage are on your personal possessions.  That’s because if you’ve recently purchased a valuable work of art, an expensive piece of jewelry or have started amassing collectibles, you may have insufficient coverage to cover their replacement if worse comes to worse.

If you’re worried about having insufficient coverage to rebuild your home to the current specifications and building codes, ask your agent about extended or guaranteed replacement cost coverage.  Extended coverage is designed to make sure that you have sufficient funds to provide extra coverage should the costs exceed the current limits of your policy by as much as 25-50%. Some insurers also extend added personal property protection to policyholders who opt for extended coverage.  Ask if this is included in your premium homeowner’s coverage.

Is replacement cost coverage enough?

That depends on what you use your home for.  If you have a home office, your current homeowner’s policy may limit the amount of coverage for office equipment to as little as $1,500. This may or may not be enough for you to purchase all the equipment you need to do your work.  Even if you don’t work from home, you need to check the limits on your personal possessions.  If the limit is set at $10,000, will this prove sufficient for you to be able to replace everything you own if your home is burnt down in a fire?  

Dude, what happened to my car?

Even if you keep your car in your garage and only drive it sparingly, it too can wind up destroyed by anything from an accident to an act of God.  If you drive a late model vehicle and don’t want to wind up downgrading your ride should the worst-case scenario manifest itself, talk to your insurance agent about gap coverage.  For a few dollars more per month, gap coverage will make sure you’ll be able to replace the car you now drive with an identical make and model should it wind up stolen or totaled.  Better still, you won’t need to carry the extra coverage for more than a few years.  Once the retail value of your ride is less than or equal to the cash value, you can drop gap coverage.  Until then, you can be secure that you won’t be ever saddled with a car of lesser value.

Is the coverage worth the extra cost?

When it comes to extending your homeowner’s coverage, don’t imagine that the added cost is going to eat you out of house and home.  Far from having to take out several new policies, what many insurers do is let their policyholders add a rider or endorsement to their current policy when it comes to adding replacement cost coverage. 

Catherine Powell is the owner of A Plus All Florida, Insurance in Orange Park, Florida.  To find out more ways to save on flood insurance, check out her website at http://aplusallfloridainsuranceinc.com/