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By Charlestien Harris

Insurance plays a huge part in your financial wellbeing. Accidents will happen and storms will come, but one way you can avoid financial ruin is to have insurance. Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.  

Insurance policies are used to hedge against the risk of financial losses that may result from damage to the insured or the property, or from liability for damage or injury caused to a third party.  When you buy homeowners insurance and other types of property insurance, you are likely to have to make a choice between at least two coverage options: replacement cost and actual cash value cost.  

Now you might be asking what do they mean, what is the difference and which should I choose?  One of the most important facts that a policyholder should be aware of is what kind of coverage the policy is offering.  The difference between replacement value cost and actual value cost is the amount your insurance company will pay to cover the loss of your property.  

An actual cash value settlement will include the depreciation value of your home, but replacement cost value coverage typically means your provider will pay out what it actually cost to replace your personal property, your home or your vehicle.  

Most homeowners are under the impression that if something happens to their home or insured property that insurance will automatically replace the item or cover the full cost of it and that is not the case.  That is why it is so important for you to check your policy to see which type of coverage you have purchased.   

For the homeowner, replacement cost means the cost of the material and labor needed to rebuild your home.  It has nothing to do with the value of the land beneath your home.  Some replacement cost policies may also include money for you to stay in a hotel while your home is being rebuilt.  

To understand what type of coverage is best for your situation, here are a few things to consider: 

  1. Policy Cost.  You will pay less for actual cash value coverage because you will receive less when you file a claim against the policy.  Replacement policies usually cost a bit more because of the pay out so be aware of that. 
  1. Your Tolerance Level for Risk.  If you don’t like the thought of paying out of your own pocket to buy new items in the event of damage, then you should consider purchasing replacement cost coverage.  
  1. Age of the Home. Older homes can cost a bit more to restore just because the expense of repairing an older home with authentic materials can be very expensive. Therefore, some home insurance companies may not offer you a replacement cost option but a modified replacement cost option which would involve for example, original features such as plaster walls being replaced by standard building materials instead.  

When you are expecting full payment for the replacement of your home and the contents  that were insured in your home, you should expect to provide a list of the following: item descriptions with makes and models if applicable, date item was purchased, the original price you paid for the item, and the item’s replacement value today.  Provide photos and the original receipts if possible. Photos can show the condition of the item and what it actually looks like.  One great resource to download a copy of a home inventory list is  Search in Publications under Family Financial Management for publication number PO633. 

Insurance can be a very tricky subject to maneuver.  Another great resource for unbiased information is your state’s Attorney General Office of Consumer Affairs or your state Insurance Commission. They often offer brochures and printed materials at the request of the general public. 

Renters I have not left you out.  While owning a home is still a very big part of the American dream, more people in today’s world are renting rather than buying.  Over 95 percent of homeowners have insurance, but less than 40 percent of renters choose to purchase insurance to protect themselves and their belongings. However, it is very important for renters to have a renters insurance policy.  

Often, renters think the landlord is responsible for damages that occur on their property.  More often than not, this is not the case. Therefore, you need to purchase your own renters insurance. Still on the fence? Below is a list of benefits that comes with having renters insurance.

  1. If you are displaced from your rental property due to a natural disaster, fire or other related reason, you often have to find another place to live.  Most renters policies will cover what is known as additional living expenses which could possibly provide reimbursement for hotel cost or renting another apartment.  
  1. If a guest is injured at your apartment, renters insurance will pay for medical expenses up to the policy limit. 
  1. Renters insurance may offer a  liability option that covers various injuries or property damage caused by children or family members. 
  1. If you purchase renters insurance, you will have coverage for anything that is considered to be “in your possession”.  That could mean not only any property you own but also any property you may have borrowed or rented.  

One of the reasons I provided this information is because of the recent winter storm that gripped most of the country and caused tremendous amounts of damage and displacement among homeowners and renters alike. I hope this information has shed a bit of light on the importance  of having insurance and being prepared for the unexpected.  For additional information on financial topics please visit our financial library at  Until next week, stay financially fit!