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Homeowners Insurance: Why Insure for Replacement Value?

By Compuquotes Team on July 19th, 2009
Homeowners Insurance

When purchasing homeowners insurance, you'll have to make several decisions about the type of coverage you want. For example, you'll have to make a decision about how much of a deductible will apply to your policy. The lower you set the deductible, the more expensive your premium will be. It's natural to look for ways to reduce the cost of your insurance policy, but it's important to balance your efforts to save money with making sure you get the quality and level of coverage you need.

Contents coverage is one of the areas where people tend to think about cutting corners on their homeowners insurance. When reviewing policies, you'll have an opportunity to choose between replacement value and depreciated value contents coverage. It's less expensive to choose depreciated value coverage. However, before you select this option, it's really important to understand the benefits of insuring your possessions for replacement value.

How Replacement Value Differs From Depreciated Value
If you've never had to file a contents claim on your insurance, you may not realize just how much of a difference the type of contents coverage you have can make on the amount of money you'll receive if you have to file a claim. Many people who opt for depreciated value are shocked by the small amount of money they are eligible to receive upon filing a claim.

When you insure the contents of your home for replacement value, that means your insurance will pay the actual cost to replace the items you have in the event they are lost or damaged as the result of a covered event. If you have depreciated value coverage, the amount of money you receive for damaged items will be based on a combination of the price you originally paid, less a percentage based on the age of each item.

Replacement Versus Depreciation Example
You may have a ten year old sofa that cost $500 at the time you purchased it. If there is a fire in your house, whether the sofa actually burns or not, it will likely have to be replaced due to smoke damage. Since it's likely that furniture prices have gone up in the ten years since you bought your original couch, you may end up having to spend quite a bit more than $500 to get a comparable new sofa.

If you have replacement value, you will select a brand new sofa and your insurance company will reimburse you the actual cost of purchasing the new furniture piece. However, if you have depreciated value contents coverage, you'll only be eligible for the depreciated amount of the sofa, which will be significantly less than the amount you originally paid for it. You'll receive only a fraction of the cost of purchasing a sofa from your insurance provider.

The Bottom Line
If you go with depreciated value coverage, you'll end up having to spend quite a bit of money out of pocket if you are robbed, experience a fire, or have to file a contents claim for any other type of covered event. If you want to make sure that you'll be able to replace your possessions if they are damaged or stolen, the only way you can do so is by selecting replacement value contents coverage on your homeowners policy.

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