New to Texas - How much coverage is enough?
If you are buying a home in Texas, it is important to understand several things about the way homeowners insurance in Texas works. There tends to be confusion about two of the most important terms to understand when evaluating a policy. These terms are "Actual Cash Value" and "Replacement Cost." Actual Cash Value refers only to the value of the property itself. This is similar to a home's "market value." With auto insurance policies, most types of coverage will not exceed the actual cash value of the car. This is rarely an issue, however, because if your car is entirely destroyed, the chances are good you will be able to buy another one just like it if you are awarded its full cash value.
Homes are a different story entirely. If your home is destroyed in a disaster such as a fire or a hurricane, the actual cash value of the home will probably not be sufficient to pay the true value of replacing your home to its former state. Many factors such as the cost of labor or repair of damage to the land are not calculated into the actual cash value. Replacement cost is the projected cost of restoring your land and home to its former state should a catastrophe occur. If you have purchased the least expensive homeowners insurance policy in Texas, known as the HO-A, then you will only be insured to actual cash value.
Hopefully you will never have to deal with a disaster that destroys your entire home. Even so, there are other good reasons for insuring your home closer to the full replacement cost of the property. If you experience a partial loss, such as a hail-damaged roof, you will usually only receive full payment (minus your deductible) for this loss if your home is insured for at least 80% of its replacement cost. If you are insured for less than this amount, you will likely only receive partial compensation.
It is a good idea to consider a policy that will cover your personal property as well. HO-B policies, for example, automatically cover basic household contents for up to 40% of the amount the house itself is insured for. If your home insurance policy limit is $100,000, the contents of your home are insured for up to $40,000. Personal property protection usually only covers actual cash value. This may not be a problem in many cases, however you might consider paying extra to get protection that covers replacement cost. Replacement cost, in terms of personal property, refers to the cost of purchasing a brand new like item, whereas actual cash value takes depreciation into account. If you have a three-year old refrigerator that is destroyed in a fire, actual cash value would be the cost of buying a three-year-old refrigerator; whereas replacement cost would be the cost of buying a similar, though new refrigerator.
If you are new to Texas and are considering homeowners insurance, it is a good idea to do as much research as possible into all the terminology of the insurance industry, as well as definitions for standard policies. If you need any assistance along the way, Texas Auto & Home Insurance is here to lend a helping hand. Just give us a call!
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