Time to Review Your Homeowner’s Insurance

In recent years, the expenses related to home construction have significantly increased due to various factors such as the post-Covid stimulus demand and low interest rates. While this may not concern homeowners who are not intending to enhance, expand, or build a new home, individuals with insufficient homeowner’s insurance policies are at risk of being vulnerable in case of an unexpected disaster. It’s essential to evaluate the details of different homeowners’ insurance coverages to determine if you need to make any adjustments.

Understanding Homeowner’s Insurance Policies

As a homeowner, it’s crucial to know the three types of insurance policies available to you. Understanding their differences will help you choose the one that suits your needs best. The three policy types are as follows:

Actual Cash Value Coverage:

  • Depreciation is taken into consideration when determining the cost of repairs.
  • For example, say your $10,000 roof is damaged from a falling tree and needs to be completely replaced. Under actual cash value coverage, a life expectancy of say 20 years would be applied to your roof.  If you had your roof replaced 10 years earlier you would receive $5,000 from your insurance company, NOT $10,000, based on 50% depreciation of the roof’s value. 

Replacement Cost Coverage:

  • Covers the repair, or replacement, costs without considering depreciation.
  • Based on a Replacement Cost “Estimate” determined by your insurance provider, or subcontracted appraiser.
    • The estimate takes into consideration the age of the home, square footage, style, quality of finishes, customization etc.
  • For example, if you have a total home loss, and your Estimated Replacement Cost Coverage is $400,000, your insurance provider will pay up to $400,000 for the rebuild.
    • WARNING: Actual costs may still exceed Replacement Cost Coverage.  Be sure and review the replacement cost estimate with your insurance provider to ensure accuracy. 

Guaranteed Replacement Cost Coverage:

  • This type of insurance is self-explanatory in that it covers full replacement costs and puts the insured in the same position they were in before the loss.
  • Despite the guarantee, a dollar figure is assigned to the insured’s property to avoid confusion around any home improvements made after the insurance is in force.
  • This is the most expensive coverage!

What Coverage is Appropriate?

Choosing the right insurance coverage depends on individual circumstances. It’s crucial to consider your ability to fill any gaps in coverage and your level of peace of mind. It’s also worth noting that the insurance sector is highly competitive, so researching different providers can help you find better coverage, lower premiums, and reduced out-of-pocket costs. To start comparing policies, check out Quote Wizard for an easy way to begin the process of comparing policies.


Don’t miss The Welch Group’s Money Tuesday segment every Tuesday morning on WBRC Fox 6 for valuable weekly insights.

certified financial planner Marshall Clay wears a gray jacket and white shirt while posing for professional photo in office

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.



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