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Replacement homeowner's insurance covers the cost of replacing your home rather than simply reimbursing you for the fair market value of your home.
What is the Difference Between Replacement Cost and Fair Market Value?
Fair market value represents the cost to replace the home minus depreciation. Replacement cost represents the amount of money it would take to rebuild the home out of similar materials.
Depreciation
Depreciation refers to the loss of value that occurs over time due to the age of the home, as well as wear and tear.
Deductibles
The deductible of your plan represents how much you are responsible for paying. For example, if you have a $500 deductible you still have to pay the first $500 out of pocket, even if you have replacement coverage
Effects
Replacement coverage policies have higher monthly premiums than actual cash value policies because of the increase in coverage levels.
Considerations
If you have an older home that has depreciated, you should seriously consider a replacement value policy because a cash value policy may not reimburse you enough for you to rebuild a similar home.
Source:
Arizona Department of Insurance: Homeowner's Insurance FAQ
Freddie Mac: Shop for Homeowner's Insurance
New Jersey Department of Banking and Insurance: Homeowner's Insurance FAQ
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