Damage to the dwelling and the contents could be the biggest
unexpected disaster awaiting a homeowner who has less coverage than
needed. Most policies provide a stated maximum amount of coverage for
the dwelling and another amount for contents.
Generally, dwelling coverage is based on replacement cost, which
means that in the event of a total loss, the policy will provide
reimbursement, up to the policy limit, to replace the structure.
Ideally, a homeowner should buy enough insurance to completely
rebuild the home, known as replacement value. This figure may not be
the home's actual market value or what the owner originally paid for
the home. This is especially true in a depressed or an inflated
market or if the home is simply not replaceable to its condition
prior to the loss. Replacement cost policies, which may pay over the
policy limit to rebuild the home, may be available from your insurer.
To determine how much insurance to purchase, an accurate appraisal of
the home for replacement cost should be made. Working with your
insurance company is important in this process. Most insurers
recommend or require that a homeowner insure the dwelling for 100
percent of its full replacement value. Some homes, very unique ones
such as national register-types or very elaborate ones, cannot be
insured for exact replacement since some features are not replaceable
in either workmanship, materials or practical costs. The insurer
and/or the agent is the best source for these issues.
Coverage for personal property is different. Most policies provide
actual cash value coverage for contents which includes depreciation,
or full value contents without depreciation. Actual cash value means
that if a power surge blows out a 10-year-old television set, the
homeowner should know what to expect. Unlike full value contents
coverage, which would essentially provide a new television set,
actual cash value coverage allows the insurance company to calculate
the useful life of the item and then depreciate the item to present
value. A depreciated 10-year-old television set would be insured for
only a fraction of its original cost. A homeowner may want to
consider replacement cost coverage to be sure that the contents are
adequately insured.
In addition to making sure that contents are covered for replacement
cost rather than actual cash value, homeowners should purchase
additional coverage for items that would ordinarily be subject to
loss limitations. Virtually all policies cover contents loss up to
the policy limit for items that include furniture, clothing, toys,
accessories such as lamps and other items which are used for decor.
Explicit limitations are set in the policy for high-cost items such
as jewelry, fine art, furs, electronics, collectibles, oriental rugs
and antiques. If a thief comes in and steals a two-carat engagement
ring, it will not be covered well enough without what is commonly
known as a personal property rider to cover specific, costly items.
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