After you’ve chose a policy type, you’ll need to determine the level of coverage you want. There are three options:

Actual Cash Value
This level of coverage pays to replace your home and possessions minus the cost of depreciation. This means you may receive less for your home or items than you originally paid for them.

Replacement Cost
This level of coverage pays whatever it costs to repair or replace your home and possessions without a deduction for depreciation.

It is now more common to be offered an extended replacement value policy, which covers a percentage of the value of the home of up to one hundred percent, plus an added percentage towards building costs. A replacement value policy simply pays an agreed set amount if the property is destroyed or badly damaged.

Consumers should also take into account the depreciation in the value of their contents over time, and insure their replacement value, rather than their resale value. After all, if the items are lost or stolen, they will need to be replaced with new items, not second hand ones.

Guaranteed Replacement Cost
This level of coverage pays whatever it costs to rebuild your home and replace possessions before the damage took place, even if it exceeds your policy limit. This can protect you from increases in construction costs and other such variables.

Guaranteed replacement means that if the home is destroyed or severely damaged, the insurance company will pay for it to be rebuilt, whatever the cost. This is the most secure form of insurance for the homeowner, as it literally means the home is guaranteed to be replaced, but the deal carries a degree of risk to the insurer. While this type of policy used to be standard, it is now becoming increasingly difficult to even find an offer of a guaranteed replacement policy.

The homeowner’s policy itself has a couple of integral features and benefits to consider. Buying replacement cost insurance verses actual cash value insurance is one of your most important decisions. Replacement cost homeowner’s policies settle any loss by replacing or repairing your dwelling and its contents with like kind and quality without depreciation. Actual cash value allows for depreciation and expects you to make up the difference as an out of pocket expense.