Homeowners Insurance Replacement Cost Vs. Actual Cash Value in Colorado

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Homeowners Insurance Replacement Cost Vs. Actual Cash Value in Colorado

Jan 25, 2023

What to Do After a Car Accident in Colorado

BY: KEVIN VOLZ | INSURANCE AGENCY PRINCIPAL

PERSONAL INSURANCE

Have you spent considerable time shopping for homeowners insurance among the various providers in Colorado? If so, it's likely that two phrases have jumped out at you: replacement cost and actual cash value. But what do these terms mean, and why are they essential elements to consider when making your coverage decisions?

By understanding the differences between replacement cost and actual cash value—and how policies differ from one another—you can ensure your most valuable asset is fully covered in the event of a disaster or unforeseen circumstances.

Read on to discover more about homeowners insurance replacement cost vs. actual cash value in Colorado!

What Is Actual Cash Value Coverage?

Actual cash value coverage (also known as ACV coverage) is the most basic form of homeowners insurance and is usually the least expensive. This type of policy pays for damaged property based on its depreciated, pre-loss value. So, if your home were destroyed in a fire and had to be rebuilt, you would receive an amount of money based on what the property would have been worth had no damage occurred.

How to Calculate Actual Cash Value of Your Home

You can determine the value of your home using the actual cash value method in one of the following two ways:

By calculating the market value of your home.
Determining the initial cost of your personal property and home, and then deducting depreciation.

Homeowners insurance usually covers both the current value of personal belongings and the cost of rebuilding a home. An insurance policy that considers depreciation, known as actual cash value coverage, is typically cheaper to buy.

However, homeowners insurance policy may also lower the payments for a claim. This means that the policy will pay only the current value of the damaged or lost property after deducting the depreciation, whereas replacement cost coverage pays the cost of replacing the lost or damaged property with a new one.

How to Calculate Depreciation?

Home insurance companies may have different ways of calculating the depreciation of items. One standard method is to use the expected lifespan of an item and then subtract its value by a certain percentage for each year since it was purchased.

For instance, if you bought a $1,000 TV four years ago and it's supposed to last 10 years, the estimated straight-line depreciation calculation would be: the loss of value per year would be $1,000 / 10 years = $100 per year. So after four years, the TV would be worth $600 according to the actual cash value calculation. This would be the amount you would be reimbursed in case of loss or damage.

Thus, using the actual cash value implies that the homeowners' insurance coverage for most of your personal property will decrease based on the years you own them.

What Is Replacement Cost Value Coverage?

Replacement cost coverage is a more comprehensive form of homeowners insurance, and it typically costs more than ACV coverage. Unlike ACV policies, replacement cost policies will pay to replace damaged property with something new of similar quality and value. This means that, should your home be destroyed in a fire and require rebuilding, you would receive an amount of money to cover the cost of replacing your property with something just as valuable.

The replacement cost is typically calculated in one of the two following ways:

The cost of physically constructing the home when it was bought
The total, initial price tag paid for all items

Some home insurance policies include coverage for replacing personal property that is damaged or destroyed. However, it does not cover the value of the land where the property is located.

The replacement cost value is the recommended coverage option as it helps policyholders secure a living situation that resembles their previous home.

It is recommended to get a contractor or appraiser to evaluate the replacement cost of the house. They can determine the cost of construction materials, any unique or valuable upgrades or additions, and the fundamental value of the house.

Sometimes, the replacement cost is paid in two installments. Initially, the insurer will pay either the actual cash value or half of the replacement cost. Once the repairs are made, and documentation is provided, the insurer will pay the remaining amount.

Guaranteed or Extended Replacement Cost

Guaranteed or extended replacement cost coverage is a type of insurance policy that provides the most comprehensive protection for your home. This coverage is an expanded version of replacement cost value (RCV) coverage and will pay for the cost of rebuilding your home to its original condition, even if the cost exceeds the estimated value of the home.

This policy benefits those living in areas prone to natural disasters as it covers increases in materials or construction costs that occur after a disaster.

It is a good option for those who can afford it. Another coverage option to consider is an extended replacement policy, which provides an additional 20% to 25% more coverage than the home's replacement value.

What are the Benefits of Using Replacement Cost Over Actual Cash Value?

When it comes to homeowners insurance, replacement cost coverage has a number of benefits over ACV coverage.

They provide coverage for inflation by adjusting the replacement cost for future purchases.
Generally, replacement cost is a more comprehensive form of coverage, so it offers more peace of mind if there is considerable damage to the home or property.
Replacement cost policies provide coverage for personal property, not just the structure of your home. This ensures that you are covered against both the physical loss of your house and any belongings inside it.
Replacement cost coverage offers more flexibility than actual cash value coverage as it considers the current market values of materials. This means you can replace your home and belongings with something just as valuable or similar in quality without having to worry about depreciation costs.
It considers any upgrades or additions that may have been made to the house, allowing you to replace them with something similar in quality and value.
Replacement cost coverage also ensures that policyholders are adequately protected against disasters or other unforeseen events.

These benefits make a clear case for why it is often more beneficial to go with a replacement cost policy over an ACV policy.

When Is It Appropriate to Use Actual Cash Value Instead of Replacement Cost in Colorado?

Actual cash value (ACV) is an appropriate policy to use if the property suffers minor damage and you won't need to replace it. ACV pays for damaged property based on its depreciated, pre-loss value, so it may not be enough to fully cover the cost of rebuilding or replacing items in order to return your home back to its pre-loss condition.

ACV is also more affordable than replacement cost coverage, so if you are on a tight budget and don't require the more comprehensive coverage of a replacement cost policy, it may be a good option for you.

However, while ACV policies may provide some protection in certain circumstances, they often do not cover the full cost of replacing items. Therefore, if you suffer a significant loss or need to rebuild your home, ACV may not meet your needs. In those cases, purchasing replacement cost coverage is usually more beneficial, as that type of policy will provide the most comprehensive coverage for all costs associated with rebuilding or replacing damaged property. That way, you can know that any losses suffered due to fire or other disasters are covered.

How Do You Determine Which Value to Use When Filing a Claim?

When deciding whether to use replacement cost or actual cash value when filing a claim, it is crucial to evaluate the total cost of replacing your property.

Replacement cost coverage makes more sense if there is considerable damage and you will have to rebuild or replace items to return your home to its pre-loss condition. It also offers peace of mind, ensuring that your home and belongings are covered against unforeseen circumstances.

Ultimately, when selecting a homeowners insurance policy in Colorado, you should consider the replacement cost and actual cash value coverage options to ensure you're properly protected.

Understanding how each type works and what they cover makes you feel confident knowing your home is protected against disasters and other unforeseen events.

By consulting with experienced advisors in Colorado, such as Badger Insurance Advisors, you can ensure that you have the best coverage for your needs and budget. Their experienced and knowledgeable agents will work with you to evaluate your home, its features, and the value of its contents so that you can get the most comprehensive coverage available for your particular situation.

Having a Question? Contact Badger Insurance Advisors Today!

Badger Insurance Advisors is here to help you find the best homeowners insurance policy for your unique needs and budget. Our experienced agents are dedicated to providing you with quality service and advice as we work together to evaluate your home, its features, and the value of its contents so that you can get the most comprehensive coverage available.

Don't hesitate to contact us today if you have any questions about replacement cost or actual cash value coverage options in Colorado. We're happy to assist you in navigating the insurance landscape so that you can make an informed decision about protecting your home.

With our expertise, you can feel confident knowing that your home is adequately protected against any disaster or unforeseen event. Get in touch with us now – we look forward to hearing from you!

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Why are insurance rates so high?

By Kevin Volz • 05 Feb, 2024

Like most other goods and services, insurance is not immune to the pressure of inflation. When determining insurance premiums, insurance companies look at many factors including industry trends, number of claims and costs to repair vehicles and homes. Specifically, home building materials and auto repair have increased, chip shortages have pressured supply chains and pricing on new vehicles, and a labor shortage persists. Let’s not forget natural disasters and our litigious culture! Add these ingredients together, and you have a recipe for higher prices better known as “Insurance Inflation”. Digging a little deeper… Since the pandemic, driving behavior has become riskier. I remember the lockdown days when no one was on the road. We were driving less, fewer incidents were being reported, and insurers were even providing rebates for limited driving activity. Those days are now long past…I know I’m getting older and becoming the “get off my lawn guy”, but driving behavior truly seems more aggressive. "People picked up some risky habits," says Sean Kevelighan, CEO of the Insurance Information Institute . "And we haven't seen those risky habits go away, even though we have more people on the road." According to the National Highway Traffic Safety Administration , the number of fatal auto accidents jumped sharply in late 2020 and early 2021. Auto insurance costs jumped more than 19% during the year ending in August, while overall inflation was 3.7%, according to the Bureau of Labor Statistics . (see image above) Gathering my Google thoughts recently lead me to this local headline: “ Coloradans report dramatic spikes in home insurance premiums heading into 2024 .” A March 2023 study conducted by the state’s Division of Insurance found that between January 2019 and October 2022, the average homeowner premium was up nearly 52%. My automated response these days to insurance customers about homeowners rates has been “we’re seeing 30-60% increases for everyone statewide”. The problem is even worse in other states like California/Florida/Louisiana where insurers have decided to no longer offer coverage in many cases. My dad lives in Florida, he recently asked “What am I supposed to do? My rate just doubled!” Other than moving to another low-risk state, there are not many clear-cut answers. Higher insurance rates may be here to stay…what can I do about it? -Ask your insurer about discounts for which you may qualify. -Claim frequency will also lead to rate increases. Before filing that next claim, ask yourself “is this worth filing? Will the claim payout be well beyond my deductible? -Explore payment options like automatic EFT payments or paying for the year in full. -Increase your deductible. -Consider a bundle of insurance coverages with one company. -Maintain a good driving record along with healthy credit (insurance companies use their own scoring model) and participate in a safe driving app offered by most insurers. -Reduce liability and coverage limits. If your net worth is minimal and you don’t have high take home pay, there is a strong argument not to have $500,000+ of liability coverage. Attorneys most likely will not come after you if you have no money. -One of the biggest ways to save is by buying an older car or a new model with a high safety rating. Do your homework, research insurance costs before purchasing your next vehicle. -Shop around, not every 6 months, but at least every other year! If you’ve been with the same company for a long time, another company will probably give you a decent offer for loyalty. -Ask about the mileage your insurer has on file. If you no longer drive as much as you used to, companies often will lower your rates based on limited mileage. Resources: http://www.rmiia.org/auto/Colorados_insurance_marketplace.asp https://www.finn.com/en-US/campaign/the-state-insurance-report https://www.apci.org/media/news-releases/release/76883/ At Badger Insurance Advisors, we understand that “stuff” happens! (that includes INFLATION). Whether you’re in our neighborhood of Aurora, or anywhere else in Colorado, we’re here to assist with all your personal insurance needs. Find us on the web at www.badgerinsuranceadvisors.com or call/text us at 303-359-1799. Kevin Volz – Agency Principal Badger Insurance Advisors

Clarifying Flood Insurance

By Kevin Volz • 25 May, 2023

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Solar Energy & Homeowner's Insurance - Things to Consider

By Kevin Volz • 19 Feb, 2023

It’s an issue of concern to an increasing number of homeowners each year. According to the Solar Energy Industries Association, residential solar energy has experienced an average yearly growth rate of 68% over the last decade. Before taxes, an installed rooftop solar energy system can cost anywhere between $15,000 and $25,000, according to the Center for Sustainable Energy. I recently received a bid for my new home in the Painted Prairie neighborhood of Aurora, Colorado, and the number was pushing $40,000…crazy! Paying to replace a damaged system could be a big financial burden for many homeowners. Being able to insure that investment against damage from a storm or other event could be key in whether you choose to add solar panels to your home. Solar panel insurance coverage is included in most homeowners insurance policies. However, you may need to increase the amount of coverage on your home to account for the cost of the system which can then raise your premium. Solar systems and rooftop panels are considered a permanent attachment to your property, like a patio or a security system. If the panels are separate from your home's primary structure—mounted on the ground or on a detached carport, for instance—they are usually included in coverage for "other structures." If you lease your solar panels instead of buying them, ask the solar company how insuring them works. Many companies will insure the panels themselves. However, some companies may want you to add them to your homeowners insurance, or have you purchase solar panel insurance that they sell. Solar panel systems can be an excellent investment, reducing your electricity bill while increasing the value of your home. Protecting that investment with the proper homeowners insurance can help ensure you’re covered if the unexpected happens. If you’d like to discuss the implications of solar and your homeowners policy, contact us at badgerinsuranceadvisors.com . Kevin Volz - Agency Principal - Badger Insurance Advisors