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Actual Cash Value vs. Replacement Cost

 

You're thinking about putting your home on the market.  It's a nice, neat home, 1500 square feet, 3 bedrooms, 1 1/2 baths, two-car garage.  So you call a realtor (and we hope that's us!) and have them come out to give you an estimate of the market value of your home; they tell you the market value is $108,000. 

 

Wait a minute. . .

 

You take out your homeowners policy and discover the Replacement Cost of your home is $157,500!  If it costs $157,500 to replace the structure, why isn't it worth that much on the market? 

 

Based on the cost of construction, materials, labor, etc., replacing a home is overwhelmingly going to be more expensive than the fair market value of a house.  Market value reflects so many other factors, including age of the dwelling, condition, location, and demand.  All property--your home included--depreciates over time.  Which brings us to Actual Cash Value.

 

It is always cheaper to buy insurance for dwellings at Actual Cash Value (ACV).  Actual Cash Value is Replacement  Cost minus depreciation.  The older a house, the worse its condition, the more the depreciation off Replacement Cost value.  If you carry ACV on your homeowners policy you do not carry a sufficient limit to rebuild your home exactly like it was, based on current construction costs.  To some consumers this is perfectly acceptable, because in the event of a catastrophic loss they are content with taking the ACV settlement and not rebuilding.  But for the vast majority of homeowners, we can't stress enough the importance of insuring your home--and its contents--at Replacement Cost Value.  In the event your home is destroyed, you'll be able to rebuild and replace!

 

As always, feel free to give us a call for more details! 

 

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