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The Necessary Level of Coverage

When you pick a policy, you should have three options to choose from: Actual cash value, replacement cost, or guaranteed/extended replacement cost. When you go with the “actual cash value” option, you’ll be reimbursed for the actual cash value of your home and possessions. Keep in mind, the insurance company will detract some value for depreciation depending on the age of your home and the contents inside.

The “replacement cost option will reimburse you for the cost to replace everything like new. Generally speaking, this is probably the option you’ll want to go with so you can rebuild if the worst happens.

Finally, the gold standard of homeowner’s insurance is the “guaranteed/extended replacement cost option. This level of coverage gives you an extra cushion above your policy limit (usually 20% to 25%) and might be a good idea in areas where home prices are always going up.

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