When you’re learning about your insurance policy, you’ll want to take a serious look at your deductible. Your deductible is an agreed upon amount that is deducted from any future settlement with your insurance company. Some insurance companies offer different levels of deductibles. Higher deductibles typically result in lower premiums. However, you shouldn’t automatically choose the deductible with the lowest premium. You’ll need to consider what your family can reasonably afford in the event of a disaster.
In the event of a claim, after the deductible is applied, your insurance covers the remaining damages in a manner consistent with the amount of coverage you purchased.
Insurance companies generally provide three levels of coverage:
Actual cash value
This is the cheapest, least comprehensive level of coverage. Actual cash value reimburses you for the amount your belongings were worth before the damage occurred. This amount is always less than the original purchase price because it accounts for the depreciation of your belongings. ACV coverage does not provide you enough money to replace your damaged belongings with the brand new versions. For example, consider a dining room table that you purchased two years ago. It was originally worth $3,000 but is now worth $1,500 in the open market. If that table were to burn in a wildfire, actual cash value coverage would only cover $1,500 of the damage.
Unlike actual cash value coverage, replacement cost provides the funds needed to replace damaged or stolen property with a new replacement. In the case of the $3,000 dining room table, replacement cost coverage would provide you with $3,000. In short, replacement cost does not penalize you for the depreciation of your property.
Guaranteed (or extended) replacement cost/value
This coverage is the most comprehensive. Guaranteed replacement cost plans ensure that you are reimbursed with no deduction for depreciation, even if the payment is technically beyond your policy limit. This helps account for fluctuating market prices and inflation. You’re covered if your property is a total loss and requires complete rebuilding. Even if the cost of rebuilding exceeds your policy limit, your home will be rebuilt using the same specifications as the original home.
After selecting a policy, it’s important to regularly review and compare prices between companies. If you’ve made upgrades to your home, like installing a security system, you should inform your insurance company and you may see a lower premium. Insurance companies look favorably on long-term investments in your home.
Finally, you need to know your insurance company’s expectations for notification of damage. Typically, you can find this information in a section entitled, “Duties After a Loss.” Some policies contain language that could require you to report damage to the company as soon as you have knowledge of it. If your insurance company can prove that you did not comply with this requirement, they might be able to deny your claim.
Your policy is a contract between you and your insurance company. As with all contracts, each side has duties and obligations to the other. As long as you hold the policy, you are responsible for paying the insurance company premiums at the agreed upon frequency. Conversely, the insurance company is responsible for indemnifying you for covered damages. All contracts have rules and limitations, and it’s important that you know them so you can insist on fair compensation in the event of a claim.
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