Today, I want to shed light on a few crucial aspects of homeowners’ insurance that are often misunderstood – the difference between Actual Cash Value (ACV) vs Replacement Cost (RC) coverage, and, Flat Deductible vs Percentage Deductible. As an insurance advisor with years of experience in protecting families and homes, I cannot stress enough the importance of making informed decisions about your coverage, especially when it comes to coverage regarding your roof.
When someone is shopping for insurance, nearly every prospective client I encounter is focused most heavily on price. And why wouldn’t they be? This industry has commoditized insurance to the point where it’s become a race to the bottom. On the flipside, when someone has a claim, the idea of price leaves their mind quickly and now they expect anything and everything to be covered and paid for quickly. The problem really comes to a head when the details emerge regarding things like ACV, RC, and deductibles. That’s when homeowners realize that they may have made a mistake and they are receiving from their policy exactly what they paid for. Unfortunately, that’s often how I meet prospective clients – they didn’t have the coverage they thought they did on their previous policy.
When you invest in homeowners insurance, you’re securing what is likely your most significant asset – your home. However, not all policies are created equal, and understanding the difference between ACV and RC coverage, or, Flat and Percentage Deductibles, can make all the difference when it comes to recovering from unexpected damages.
Actual Cash Value (ACV) coverage determines the reimbursement amount for your belongings or property based on their current market value. In simpler terms, it considers depreciation. This means that if you need to replace your roof due to damage, the payout will factor in the age and condition of your roof at the time of the incident. While ACV coverage might have lower premiums, it may not be sufficient to cover the full cost of replacing your roof, which could lead to out-of-pocket expenses.
On the other hand, Replacement Cost (RC) coverage ensures that you receive compensation for the full cost of replacing your damaged roof with a new one, regardless of its age or depreciation. Opting for RC coverage provides you with the peace of mind that, in the event of a covered loss, you won’t have to worry about substantial expenses to restore your home. Though RC coverage generally comes with slightly higher premiums, the investment is well worth it, considering the financial protection it offers.
Let’s delve into the significance of having Replacement Cost coverage specifically for your roof. Your roof is one of the most vulnerable parts of your home. In our area, wind and hail claims on roof’s are the vast majority of the claims we see in our office. If a storm were to cause significant damage to your roof, having RC coverage ensures that you can replace it with a new one without bearing the burden of substantial costs. The last thing any homeowner wants to deal with after a disaster is the financial strain of getting their home back to pre-loss condition.
To further illustrate the importance of Replacement Cost coverage, let’s consider a hypothetical scenario. Say, a powerful hailstorm causes severe damage to your 15-year-old roof. With ACV coverage, the insurance company will take into account the roof’s age as well as wear and tear, leading to a significantly reduced payout. If it was a 30-year shingle, on the high end you will only collect half the cost of the roof which means you only have half of the funds needed to install a new roof. In contrast, with RC coverage, you’d be able to replace the damaged roof without shelling out thousands of dollars.
Now, let’s discuss deductibles – the amount you’re responsible for paying out of pocket before your insurance coverage kicks in. Most homeowners insurance policies offer two types of deductibles: a flat dollar amount or a percentage-based deductible.
A flat $1,000 deductible means you would pay a fixed $1,000 out of pocket for any covered claim before your insurance coverage takes over. This type of deductible is straightforward and easy to understand. However, keep in mind that a lower deductible often comes with higher premiums.
On the other hand, a percentage deductible is calculated based on a percentage of your home’s insured value. For example, if your policy has a 2% deductible and your home is insured for $300,000, you would be responsible for the first $6,000 of a claim. Percentage deductibles are often used for specific perils, such as wind/hail damage, and they can result in significant out-of-pocket costs depending on your home’s insured value. Even worse, most policy holders are not aware that they have this type of deductible until after they file a claim.
As an experienced insurance advisor, I encourage you to evaluate your risk tolerance and financial capabilities when choosing a deductible. A higher deductible may mean lower premiums, but it also means you’ll have a larger financial responsibility in the event of a claim. Even more importantly, make sure you know what you’re buying before you purchase that policy. At Samuelson Insurance, our standards are to write Replacement Cost Coverage and flat deductibles so that there are no surprises at claim time. If we deviate from that standard, we do our best to make sure our clients understand exactly what they are getting before we sell that policy.
At the end of the day, homeowners insurance is not a one-size-fits-all solution, and understanding the difference between Actual Cash Value (ACV) vs Replacement Cost (RC) coverage and Flat vs Percentage based deductibles is crucial to protecting your home properly. Opting for Replacement Cost coverage can save you from unexpected financial burdens after a disaster.
As a trusted insurance advisor, we are here to guide you through the process of finding the ideal coverage tailored to your needs. Your home is your sanctuary, and we are committed to ensuring it remains safeguarded, providing you with peace of mind for years to come.
If you have any questions or need assistance with your homeowners insurance, feel free to reach out. Together, let’s secure the future of your home and your family.
James Hazzard is the owner of Samuelson Insurance Agency in Portage, Indiana. With years of experience in the insurance industry and entrepreneurship, he aims to educate readers and clients on various insurance and entrepreneurial related topics to help them make informed decisions. Please note that the views expressed in James’ articles are his opinions and should not be considered professional advice.
