Homeowners’ insurance can protect you financially if a tree falls on your home, a fire burns it to the ground or a thief breaks into it and steals your most valuable possessions. The right homeowners’ policy will provide you the monetary payout you need to rebuild or repair your home or replace the stolen, damaged or destroyed valuables inside it.
But not all homeowners insurance in Houston is created equal. There are two main types of insurance policies. One is less expensive but provides less coverage. One costs more but will provide bigger payouts should your home be damaged or destroyed.
Knowing the difference between the two is a key for homeowners who are shopping for the right insurance policy.
Some homeowners’ insurance policies provide what is known as actual cash value coverage. As the name suggests, this type of policy only reimburses you for the current cash value of your home or any of the items inside it. The second type of insurance provides what is known as replacement cost coverage. If something inside your home is destroyed or damaged, this type of policy will pay out the full cost of either repairing or replacing an item.
It’s a bit complicated, but in general, replacement cost coverage will generally provide you with a larger payout.
Consider this example: Say your TV that you paid $500 for is destroyed in a fire. Say that TV was five years old when it was destroyed. Your insurance provider might determine that during those five years, your TV depreciated by $200, meaning that it was worth $300 when it was destroyed. If you have a policy based on actual cash value coverage, your insurer would reimburse you $300, the appliance’s value.
But what if your insurance provides replacement cost coverage? Your insurance provider might determine that the cost of replacing your destroyed TV with a modern set that comes with the same features might be $600. In this case, your insurer would reimburse you that amount.
Your insurer might instead determine that, because the average cost of new TVs has dropped since you first bought yours, that it would cost you just $400 to buy a new set that replicates the one that was destroyed. In such a case, your insurer would reimburse you $400.
As you can see, the reimbursement you receive with replacement cost insurance can vary. But in general, you can expect a bigger payout because this type of insurance doesn’t factor in depreciation.
There is a downside with replacement cost homeowners insurance in Houston: It tends to cost more. That higher fee is a result of the stronger coverage. If your primary goal is to find the most affordable homeowners’ insurance coverage, then choosing an actual cash value policy will generally leave you with the lowest annual premiums.
Before making any major decisions on buying a homeowners’ insurance policy, talk to a knowledgeable insurance agent. This professional will look at your current coverage needs and help you tailor a policy that will best fit your budget while providing the protection you need. This pro can also help you determine whether an actual cash value or replacement cost policy is the smartest choice.