House Completely Destroyed? Your Insurance Payment May Not Completely Cover Your Losses

When your home is obliterated by fire, extreme weather, or other unfortunate event, it's natural that your thoughts will turn towards recouping your losses. Although your homeowner's insurance will typically cover the damage, you may be in for an unpleasant surprise when you get the insurance check. Here's what you need to know about two methods insurance companies use to calculate your settlement.

Replacement Cost vs. Cash Value

Property insurance providers use a number of different processes to calculate how much they are going to pay on your claim. However, the two most common ways is to either work out the replacement cost and cut a check for that amount or give you the estimated cash value of the property.

When an insurance company uses the replacement cost method, it calculates how much it would cost to replace the destroyed structure using the same materials, design, and workmanship. Essentially, you would receive enough money to rebuild your home based on current-day pricing. This is the method that's most beneficial for you, because it aims to put you in the same position you were in before the tragedy occurred.

On the other hand, the cash value method pays you based on the fair market value of the home. This is the amount of money you would receive if you had put the home up for sale. This method takes into account some of the same things a real estate agent would consider when pricing your home including the amount other homes in the area are being sold for, depreciation, and whether the house needs to be repaired.

In general, the cash value method typically results in a check for less than it would cost to rebuild the home, which could lead to you settling for a smaller home or making up the difference out of your own pocket.

Maximizing Your Payout

The type of method your insurance company uses is detailed in your policy. If your provider uses the cash value method to reimburse you for your losses, then you may want to consider getting your policy changed so that the replacement cost method is used instead.

It's important to note, however, that insurance policies that use the replacement cost method are typically more expensive than those that use the cash value because of the potential for a higher payout. Considering that the market value of a home fluctuates constantly, it may be worth the extra charge to ensure you'll get the money you need to rebuild your home if disaster strikes.

To learn more about the replacement cost method or to make changes to your insurance policy, contact your provider or a knowledgeable insurance agent.