Retirement & Financial Planning Report

A replacement cost policy will cost much more than an actual cash value policy. Image: Andrey_Popov/

In your homeowner’s insurance, you should be sure that you have a “replacement cost” policy rather than an “actual cash value” policy.

With an actual cash value policy, in case of damage you receive the property’s value, minus depreciation. Typically, that amount will be far less than it would cost you to replace or rebuild whatever is damaged.


However, a replacement cost policy will cost much more than an actual cash value policy. How can you trim your costs yet still maintain proper coverage?

* Increase your deductible. You’ll pay lower premiums if you don’t expect your insurance to pay you back for every dollar you spend. With a higher deductible you’ll likely save money in the long run, even if you pay for the occasional broken window out-of-pocket, yet you’ll still have insurance against major disasters.

* Avoid over-insuring. The land under your house won’t lose value in case of fire, theft, storms, etc., so you shouldn’t include its value in deciding how much homeowner’s insurance to buy. If you do, you will be paying more for unnecessary coverage.

* Make your home more secure. You need smoke detectors, for example. Other steps you can take to make your home more resistant to natural disasters include adding storm shutters and reinforcing your roof. In addition, modernizing your heating, plumbing, and electrical systems can reduce the risk of fire and water damage. All of these steps may lead to lower premiums.

Your homeowner’s coverage probably should include earthquake insurance, which is not covered in most homeowner’s policies. In many areas of U.S., earthquake insurance can be obtained through a relatively inexpensive rider to your homeowner’s policy. You might need to buy separate flood insurance, too, depending on where you live.

In addition to insuring the house itself, your homeowner’s policy also will cover its contents. Thus, you should review the limits in your policy and the value of your possessions at least once a year. You’ll want your policy to cover any major purchases but you don’t want to spend money for coverage you don’t need. For example, if your home entertainment system is no longer worth the money you paid for it, you’ll want to reduce or cancel any extra insurance coverage you’ve arranged.

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