Are you planning to insure your property but don’t know the basics? Then, you ought to know about the different valuation approaches that your insurance company can apply to determine the value of your insurance policy. Insurance valuation is the key determiner of how your property will be valued in case of a loss. With the availability of various valuation methods, it’s important to plump for an option that suits your requirements.
Without further ado, let’s quickly explore 3 divergent insurance valuations that you are likely to come across when insuring your property;
1. Replacement Cost
The replacement cost approach is the most sought-after valuation method for property insurance. Essentially, it covers the cost of repairing or replacing your building with materials of similar or comparable quality. The approach does not consider the value of land that holds the building but calculates the cost of purchasing new construction materials and hiring contractors to repair or replace your building. In addition, it’s important to consider that the replacement cost can be higher than the market value due to the effects of inflation.
2. Actual Cash Value
The actual cash value approach is almost similar to the replacement cost valuation method in that both consider the cost to repair or replace a building. However, when you choose an actual cash value, your insurance firm will deduct depreciation costs of your building. The approach allows you to insure your building for less but you will claim less. You should consider the actual cash value valuation method if you wish to rebuild using cheaper methods and materials.
3. Functional Replacement Cost
You may consider the functional replacement cost approach when flexibility and cost-saving matter to you. The functional replacement cost is lower than the replacement cost, which translates to lower coverage amount and insurance premium. For example, the valuation will cover the entire cost of repairing your roof or wall but using equivalent and less expensive materials. So, if you’re searching for an option that will save you money, consider the functional replacement valuation for your property.
Clearly, the valuation approach that you choose for your property insurance policy will affect your premium payment and your claim payment. Therefore, select an approach that will best suit your needs and budget. Actual cash value, replacement cost, and functional replacement cost are the prevalent valuation approaches for property insurance. So, if you have been skeptical about taking a property insurance policy because you didn’t know the exact valuation approach that would apply to your case, now you don’t have an excuse.