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My agent is offering replacement cost and actual cash value home insurance. Which should I choose?

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Whether or not you choose actual cash value or full replacement cost comes down to how much you can afford to pay for the policy. Actual cash value comes at a lower premium amount, but it also has limitations that are not present in a full replacement cost policy. Simply put, the premiums are lower because filing a claim against the policy will not result in getting the repairs paid for, or in having to rethink the materials used for making those repairs.

Actual cash value insurance on your home is a depreciated amount, as well as being dependent on the cost of materials. If the home is older, ACV insurance may not pay to repair the home with the same materials that were originally used. In the event of the home being destroyed, ACV home insurance might only pay out a percentage of the home value, leaving you to pay for the remainder of the costs out of pocket. If you are in a position to invest your own cash in the repairs or rebuilding of your home, then ACV home coverage may be sufficient to suit your needs.

Replace Cost home insurance insures the home so that it will be repaired or replaced regardless of the costs involved. Where repairs are concerned, that means using the same materials as were used in the original construction regardless of how much the cost of those materials have increased since the home was built. After many years, replacement cost would rebuild the home to the same specifications, even though the cost of the materials may have doubled or even tripled. Replacement Cost home insurance will cost you more, but a single claim against the property will generally make having the added value of Replacement Cost worth the increased premiums you had to pay.

answered Aug 13, 2012 by anonymous
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