2/21/2006

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

"What is replacement insurance?"

Dear Dave, 

I just spoke with my insurance agent, and he said there are many different definitions of replacement-cost insurance. My policy reads that they'll pay the full amount of the policy plus 20 percent if my house burns down. What is your definition of replacement-cost insurance? 

Mark, via e-mail 



--------------------------------------------------------------------------------

Dear Mark, 

This guy is wrong. There aren't multiple definitions for replacement-cost insurance. 

Replacement cost is an insurance term, and the definition on the test an insurance agent must take is that your home is replaced regardless of the face amount of the policy. If your policy says $50,000 and it takes $75,000 to replace your home, then they must replace your home. It's that simple. 

Now, keep in mind that an insurance company will not intentionally under-insure your property with replacement-cost insurance. They're not stupid. They'll do an analysis on the home looking at the square footage, the neighborhood, amenities, and all these issues will be addressed when you take out a home insurance policy. 

But don't forget your responsibility, either, Mark. If you bought your home for $100,000 and over the years it appreciates to $150,000, that's great. But if you forget to update your policy and the house burns down, you'd get $120,000 and that's it. That is not "replacement." 

Dave 


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