Protecting Your Things in House

A typical homeowner's policy covers only some of the value of your belongings. Normally, coverage is equal to 50 to 70 percent of the value of the house. For example, if you insure your house for $100,000, your belongings will be insured for $50,000 to $70,000, depending upon your insurance company. You can always add to the coverage for your belongings if you pay a higher premium. So, if you own a lot of valuable things that are worth more than $70,000, you will want to consider increasing your belongings coverage proportionately.

The next step is to decide whether you want a policy that covers actual cash value or one for the replacement value of your belongings. Just as with your house, you'll probably be better off with replacement value, although it does cost a little more.

Typical homeowner's policies cover actual cash value. Unfortunately, you may be in for a big surprise when you file a claim because the payout will probably be significantly less than the cost of replacing the item.

Let's say a windstorm lifts a tree from your front yard, blows it through your living room window, and destroys the sofa you bought five years ago for $2,500. You're not worried, though, because you have homeowner's insurance. But if your belongings are covered for cash value, the insurance company values your five-year-old couch at whatever it's worth today, or rather, what you could have sold it for just prior to it being damaged. This is called depreciation.

Depreciation is the decrease in the value of something caused by the object's use. After a certain number of years, the thing may have no value according to the insurance company even though it would cost you a considerable amount to replace it.

Look at that $2,500 sofa. The insurance company may say that your sofa had a "useful life" of five years. So each year, it is worth one-fifth (or $500) less than the year before. After three years, the sofa is deemed to be worth only $1,000. They arrived at this value after doing this simple calculation:

$2,500 minus the depreciation (which is $500 times three years or $1,500) equals $1,000. So all you'd get for that couch is $1,000.

However, if your couch were covered by a full replacement policy, the insurance company would have to buy you a new couch that is comparable in value to the couch you lost when it was brand new. Actually, they have a choice. The insurance company can cut you a check, but they also have the right to repair or replace the couch instead. A policy that pays to replace your belongings costs about 10 to 15 percent more than an actual cash value policy. Seriously consider going the replacement cost route. It may save you a lot of money when you have a claim.