There are two ways insurance companies want to insure your home: for Replacement Cost or for Actual Cash Value.
Replacement Cost – the insurance company will estimate what it would cost to rebuild your home after a total loss. Not the cost to get a better home, not the cost to get a smaller home, the cost to get the same home. This policy wants to put you back to where you were. It’s a higher cost for a better coverage.
Actual Cash Value – this is Replacement Cost less Depreciation. By definition, it’s a smaller coverage than the above method, so it’s a less expensive coverage. In the event of total loss, the insurance company will give you a check for what the house is worth, regardless of the cost to rebuild or the loan value.
Both policies have their place in the insurance world. Some homes don’t qualify for Replacement Cost coverage. Some homeowners only want an Actual Cash Value policy.
Final note if you have a mortgage on your home: the mortgage contract will require you to have coverage greater than or equal to the loan value. If your home coverage is lower, you’re breaking the loan contract. Depending on the contract language, the bank can begin penalizing you. Therefore, if you let your home insurance expire, you’re also breaking the loan contract.
**Contact a Behnke Insurance Agent for details**