People are often surprised at the value the insurance company comes up with for damaged, destroyed, or stolen property. We’ve seen this happen with all types of insurance, whether it’s homeowners, business, or auto.
To avoid any surprises, it is helpful to understand how insurance companies determine the value of your property. Here’s a quick guide.
Homeowners insurance
When you purchase a homeowners policy, the conservative approach is to buy coverage for at least 100% of the estimated replacement cost of your home.
If you insure your home for its market value, your insurance company may not cover the entire cost of replacing it. They will look at its market value to determine the payout. As we saw during the housing crisis, this can fluctuate significantly, leaving you financially exposed.
If you’ve made home improvements like a finished basement or additional rooms, you will want to have your home’s replacement cost appraised, and choose a policy that covers that amount.
Business insurance
Property insurance for a business works slightly differently. The insurance company typically uses two different methods to come up with the value of your property.
The first is replacement cost, which is the actual amount it would take to replace damaged or destroyed property such as equipment, furniture, and buildings. The other method is cash value, which takes into account replacement cost, minus depreciation for wear and tear.
Like a homeowners policy, the conservative approach is to insure your business for the replacement cost.
Auto insurance
Auto policies have traditionally used the cash value of your vehicle, though there are other options.
Your car depreciates every time you drive it, and this is taken into account in the case of a loss. The insurance company will look at the age of the car, the wear and tear, and the miles driven to determine its worth. Your car may well be worth less than the amount of your car loan because of depreciation.
Choosing a policy that covers the replacement cost of the vehicle is the safest approach. This type of coverage often provides enough to purchase a similar new car and also cover expenses like title fees and sales tax.
No matter what type of policy you are purchasing, deciding which type of coverage you want will depend on the value of your assets, the exposure you are comfortable taking on and the premium payments you can make.
To make an informed decision, it’s best to speak with an agent who thoroughly understands the numbers and knows all the many types of policies that are available. The agents at John B. Wright insurance will always make sure you are protected. Contact us here to learn more about your options.
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