I would like some input on what type of insurance I should get on the double I am about to purchase. Right now I have rebuild value which is about $147.00 per month. Should I get appraised value? The rebuild value is about $480,000 but the appraised value is $108,000. I am buying the double for $69,000. I am sure the appraised value will be much lower.
Aaron,
The Following is a past post I made on Replacement Cost vs Actual Cash Value that may be helpful:
"We write with many markets. Most of the better rates are from companies that write the Building coverage on a "Replacement Cost" (RC) basis. It is a better coverage for the policy holder than "Actual Cash Value" (ACV). A policy based on ACV will normally have a lower limit (ACV = RC minus depreciation). RC is the cost to rebuild the structure with the same kind and quality. In a market where rents are depressed, the RC will often be significantly higher than the ACV.
The problem with ACV is that, on a partial loss, the claim, under an ACV basis, has a deduction for depreciation. You will have to kick in for the deductible and the depreciation. If your Rental is in good shape, updated systems, well maintained, etc. the rates from some companies with only RC may be equivilant to others that will only do ACV. I just wrote one in CT that one of our carriers for $400,000 RC was $100 less than the next best rate which was based on $110,000 ACV for the same property.
The second item that was confusing is what the payout will be. Most policies (homeowners or dwelling/fire policies) that include RC contractually require you to rebuild in order to get the Replacement Cost. The initial payment will be for the ACV and then after you rebuild they will pay the remainder. If you chose not to rebuild you do not get more than the ACV. The reason for this clause is that the policy is to make you whole. If they paid the RC without you having to rebuild, you would be getting more than the value at the time of the loss.
Hope this helps. If you need more info on the RC vs ACV please let me know."
Also note that the Appraised value will include the value of the land. The ACV of the building should be less.
Aaron,
The Following is a past post I made on Replacement Cost vs Actual Cash Value that may be helpful:
"We write with many markets. Most of the better rates are from companies that write the Building coverage on a "Replacement Cost" (RC) basis. It is a better coverage for the policy holder than "Actual Cash Value" (ACV). A policy based on ACV will normally have a lower limit (ACV = RC minus depreciation). RC is the cost to rebuild the structure with the same kind and quality. In a market where rents are depressed, the RC will often be significantly higher than the ACV.
The problem with ACV is that, on a partial loss, the claim, under an ACV basis, has a deduction for depreciation. You will have to kick in for the deductible and the depreciation. If your Rental is in good shape, updated systems, well maintained, etc. the rates from some companies with only RC may be equivilant to others that will only do ACV. I just wrote one in CT that one of our carriers for $400,000 RC was $100 less than the next best rate which was based on $110,000 ACV for the same property.
The second item that was confusing is what the payout will be. Most policies (homeowners or dwelling/fire policies) that include RC contractually require you to rebuild in order to get the Replacement Cost. The initial payment will be for the ACV and then after you rebuild they will pay the remainder. If you chose not to rebuild you do not get more than the ACV. The reason for this clause is that the policy is to make you whole. If they paid the RC without you having to rebuild, you would be getting more than the value at the time of the loss.
Hope this helps. If you need more info on the RC vs ACV please let me know."
Also note that the Appraised value will include the value of the land. The ACV of the building should be less.
@Aaron Raymond if you insure for the lower amount, you will most likely not get 100% of your claim paid.
Most insurance companies will have policy language stating you need to insure the building to it's full replacement cost. If you do not, they can penalize you for being under-insured.
Without getting into the insurance math on this, think of it this way, if you pay to insure 1/4 of the rebuild, chances are they will pay 1/4 of ANY Property claim. So if you have a $40,000 fire, they would pay $10,000.
Confirm the policy language with your agent so you can know for sure how much risk you are taking on if you insure for the appraised value.
I typically always get replacement cost coverage. Sometimes I make exceptions if perhaps the building is in really bad shape and my investment is low, then ACV coverage in that case may make sense.
Some wealthy people I know who have lost of property dont even bother with insurance at all. They just self insure, however, one nature disaster or fire could really hurt you I think.