Insurance lingo watch: Actual cash value vs replacement costs

Sometimes, insurance lingo is quite confusing. Even simple terms can be misunderstood when you review your policies. One question that our agents hear all the time is “What’s the difference between cash value vs. replacement costs in homeowners insurance?” Here’s the scoop.

Cash value insurance coverage is the cost of the item minus depreciation. So, if a fire destroyed your entire home or a thief broke in and stole your TV, you would be paid for the cost of your home or TV less depreciation. That means you might not realize enough payment to rebuild your home or replace your TV in today’s market without dipping into your own pocket to supplement the costs.

Replacement cost insurance coverage, on the other hand, does not factor in depreciation. It pays you the cost to rebuild/replace in today’s marketplace. Most homeowners insurance policies quoted are for “replacement cost” by default but always check to be sure. Even with replacement cost coverage as an option, you need to review your policy limits with your insurance agent regularly to be sure they are sufficient for your needs.

There’s a third, less-common option called guaranteed or extended replacement cost. The Insurance Information Institute explains:

This policy offers the highest level of protection. A guaranteed replacement cost policy pays whatever it costs to rebuild your home as it was before the fire or other disaster–even if it exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally won’t cover the cost of upgrading the house to comply with current building codes. You can, however, get an endorsement (or an addition to) your policy called Ordinance or Law to help pay for these additional costs. A guaranteed replacement cost policy may not be available if you own an older home.

As we noted, in most policies, replacement cost would be the default, but check. So why would anyone opt for actual cash value rather than guaranteed or extended replacement? Like most things in life, it comes down to cost. There may be some instances when an actual cash value coverage makes sense, such as on a vacation home.

Even when you have replacement cost coverage, there are some instances when that coverage might not be enough. One example is in the case of items that are irreplaceable or that increase in value over time, such as art, antiques, or special collections. Plus, most insurance companies set limits on how much a standard homeowners policy will cover for valuable items such as jewelry and furs. If you have valuables or special collections, talk about those with your independent insurance agent. You might need a policy add-on called a floater (more lingo!) to extend coverage for those items.

Of course, there are other coverage issues you need to consider in a homeowners policy, such as liability coverage. The Insurance Information Institute offers a good primer with guidelines on how to protect your home and your assets with adequate insurance coverage: How much homeowners insurance do I need?

There are no dumb questions, just dumb lingo

Insurance can be very confusing and that’s why having an agent as a guide can be great. Many TV ads make car and home insurance seem like simple choices, but as the saying goes, the devil is in the details. It’s important to fully understand what an insurance policy does and doesn’t cover so that you don’t face any unpleasant surprises at the time of a loss. Make sure that you talk over any lingo or unfamiliar terminology in your policy with your agent.

Reprinted from Renaissance Alliance – no usage without permission.

What’s an insurance rider?

Every industry has its own business jargon and insurance is certainly no exception … in fact, we may have more than our fair share, and a lot of lingo can be quite confusing to the average person. One question that we get on the regular is “what’s an insurance rider?”

An “insurance rider” is more commonly known as an “endorsement,” a term which might also be confusing! The concept is actually pretty simple: an optional, written addendum to a basic insurance policy that modifies the terms of the insurance contract in some way.

Generally, an endorsement would be added to protect the insured by expanding or limiting the coverage in some defined manner. An endorsement or rider can occur at the start of a policy or can be added midterm. Depending on whether you are adding or limiting your coverage with the endorsement, it may have an impact on your premium

The National Association of Insurance Commissioners (NAIC) is a great source of education on this and other insurance matters. See: What is an Insurance Endorsement or Rider? They offer this definition and explanation for how endorsements work:

An endorsement, also known as a rider, adds, deletes, excludes or changes insurance coverage. An endorsement/rider can also be used to increase standard limits of coverage and take precedent over the original agreement or policy.

An insurance endorsement/rider is an amendment to an existing insurance contract that changes the terms of the original policy. An endorsement/rider can be issued at the time of purchase, mid-term or at renewal time. Insurance premiums may be affected and adjusted as a result.

You can have an endorsement/rider on your homeowners and renters policy, life insurance and auto insurance policies. It can include adding or deleting people and locations to your current insurance policy. Endorsements/riders are important because they address issues or items not in the original contract or policy.

  • Additional Coverage – An endorsement that adds or includes coverage that would otherwise be excluded.

  • Exclusions – Some endorsements exclude coverage for certain types of claims.

  • Modification of Coverage – An endorsement can expand the scope of existing coverage.

Examples: for a standard homeowners policy, common endorsements might include coverage for a home business, coverage for damage incurred during natural disasters such as earthquakes, floods or windstorms, coverage for property’s replacement value rather than cash value or – as discussed in a prior post – an endorsement might expand coverage limits for valuables.

A specific endorsement may not be available from every insurer or in every state. A good insurance agent will likely inform you of any common policy options, but when discussing a specific type of insurance with your agent, ask if there are any options that would expand your coverage.

NAIC offers the reminder that because a rider/endorsement is part of the legal terms of your policy, be sure to keep a copy with the policy.

Reprinted from Renaissance Alliance – no usage without permission.