If you’ve ever started researching insurance policies online but quickly found your eyes glazing over, you’re not alone. 

Many people are confused or unsure about the technical ins and outs of insurance. That’s why it’s important to find an agent you know, like, and trust! Agencies like ours are available to answer any questions or uncertainties you may have about your insurance policies. 

Ready to learn a little? We’ve compiled six commonly misunderstood concepts in insurance and provided simple explanations for each. Dig in!

Replacement Cost

If your insurance policy is set up to cover “replacement cost” it will do just that – cover the cost to replace or rebuild an item or property of similar quality. Replacement cost coverage does not subtract depreciation from the value. 

An example of something that is typically covered under a replacement cost policy is a home. 

Actual Cash Value

A replacement cost form will pay to replace the cost of the unit, in today’s dollars. If your insurance policy is set up to cover “actual cash value” (ACV), it only pays for the depreciated value of the item. 

A typical motivation to opt for an ACV policy would be to save on replacement cost policy premiums. An example of what is typically covered under an ACV policy are the shingles on your roof. 

Recoverable Depreciation

Now let’s talk about the gap between replacement cost and ACV. That number is known as “recoverable depreciation” – a gap that can be recovered if you show proof that a repair or replacement is complete or contracted to be completed. 

When you’re covered under a replacement cost policy, your first payment from the insurance company is typically the ACV. Then, once you have repaired or replaced the covered item or property, and show proof, you’re typically able to claim the recoverable depreciation. 

Note that the only time you have access to recoverable depreciation is if you have a full replacement policy form. 

Agreed Value

When a policy owner would rather have an item replaced at an agreed-upon value, in the event of a loss, you could opt for agreed value coverage. In this type of coverage, you and your insurance company come to an agreement as to what an item is worth. As long as the two parties (owner and insurance company) agree on the value, it can be insured at that value. 

Items that are often covered by this type of insurance include classic cars and jewelry – this often requires an appraisal or bill of sale. At the time of a loss, the policy pays out the agreed value of the item.

Wind/Hail Deductible

Depending on where you live, your homeowner’s insurance policy may include a wind/hail deductible. This is a separate, higher deductible that only applies when a loss is caused by wind or hail. In states where hurricanes are common, this deductible could be daily high.

A wind/hail deductible is often calculated as a percentage (1-2%) of the property’s value instead of a flat amount deductible.  

Umbrella Coverage

As recently written by Gretchen Rehm Financial: “Umbrella policies, also commonly known as personal liability policies, are one way to prepare for nearly any insurance issue. Umbrella policies act as an extra cushion for the underlying liability policies you already have in place. These policies provide coverage for costs exceeding the limits of and claims outside of your current insurance policies’ reach.”

Continued: “Umbrella policies can cover property damage and legal fees, among many other costs. If you own a rental property or small business, have teen drivers on your insurance, possess significant assets, or feel for any reason you may be in a position to be sued, an umbrella policy may be necessary for you.”

What additional questions do you have about these terms? Reach out to our friendly team for assistance, today!