Replacement Value Insurance

by Gary Foreman

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I recently read that the worst homeowner's policy is a "Cash Value" Policy. I checked my condo insurance policy and it is "Cash Value." Should I be concerned?

Lynn asks a good question. And, the simple answer is yes, she should be concerned.

Let's begin by remembering why we buy insurance. The purpose of insurance is to cover a loss that you can't afford to pay yourself. So the goal is to have all the big losses covered while keeping your premiums to a minimum.

The part of the policy that Lynn is referring to concerns the loss of her personal property. She's found that there are two types of coverage that she can purchase. One is called "actual cash value."

Suppose her home is burglarized and they steal her television. If she had cash value coverage her insurance company would pay her what the TV was worth.

If you've ever tried to sell used furniture, you'll remember that prices are a fraction of their original cost. And, that's the trouble. Lynn's probably not going to want to replace all her stuff with used items. A more likely result is that Lynn would end up buying a new TV and have to pay the difference herself.

At that point, she would wish that she had purchased "replacement cost coverage." That would have paid for a new replacement for her television, which clearly is a much better deal under the circumstances. And, easier on her credit card!

Yes, the replacement cost coverage is more expensive than cash value coverage. But, think about why we have insurance. If you can afford the higher premium, it's worth it. Remember our goal is to avoid the big unaffordable losses.

Lynn might want to do a little more reading. The National Association of Insurance Commissioners (NAIC) has a website at She'll find links to each state's website as well as help for filing any complaints that she might have about an insurance company.

In her reading, Lynn will find out about another potential problem. On the Texas Department of Insurance's website at, they remind us to check your policy's dollar limits. No matter what coverage you have you will not receive more than the policy's limit.

Find out what the dollar limit is for your possessions. It's probably set as a percentage of the value of the house. For instance, if you have $100,000 coverage on the building, the contents might be limited to 40% or $40,000.

Is that enough? One way to find out is to take an inventory of your home. List the items in each room of your home. Also list the cost of replacing each item. If you add them up it will give you a good idea of how much coverage you need.

The inventory will also be invaluable if you have a loss. The insurance company will be reluctant to pay you just because you remember a vase from Aunt Ethyl used to sit in the dining room. A picture or receipt is much better. Serial numbers are helpful. For more valuable items, you might even want to have an appraisal done.

Lynn should also be aware that some types of items have their own limits regardless of the policy limits. If she has jewelry, furs or collectibles, she may find that those items are excluded or under-covered. Her insurance agent can tell her what the limits are and sell her extra coverage for those items if necessary.

Lynn may also want to consider flood, earthquake or hurricane insurance. Homeowner's policies don't cover for that.

OK, so far all we've done is tell Lynn that she needs more insurance. How's she going to pay for it? Two things should help offset any premium increase.

A higher deductible could save Lynn quite a bit. Most people don't need a deductible of $250 or $500. If they had to, they could cover the first $1,000 of a loss. You'd be surprised how much that will reduce your premium.

Lynn might also want to do a little insurance shopping. There are surprising differences between companies. She will need to make sure that she's comparing the same coverage with each company.

Lynn's right. It's important to check out your insurance policies before you try to collect on a claim. That's the wrong time to find out that you don't have the proper coverage.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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