It is crucial to understand how your homeowner's insurance works fully. With homeowner's insurance, the biggest thing that it covers is your dwelling or your home. With your dwelling coverage, there are various options you choose from to replace your home if it becomes damaged.

Actual Cash Value

The first coverage option you can choose for your dwelling is actual cash value coverage. This will pay for the cost to replace your property that is damaged, with money taken away for depreciation. Actual cash value is not often used for dwelling coverage, although it can be. Actual cash value is more often used for personal belonging coverage. It is not the best coverage option, though, because the depreciation deduction can greatly reduce the money that you get.

Replacement Cost Value

The most common type of coverage for homes is a replacement cost value. With this, your insurance will pay to replace your entire house if it is destroyed with materials of a similar kind and quality. Basically, if you have granite countertops in your kitchen, they will pay for granite countertops. If you have hardwood floors, they will pay for hardwood floors.

However, they are not going to pay more than your coverage limits to replace your home. So, if the cost to replace everything exceeds your dwelling limits, you will only get paid up to your dwelling limits. You can also get replacement cost value for your personal items, which is generally better than actual cash value, as you will get the money to replace your old items without losing out on depreciation.

Functional Replacement Cost Value

Another option is functional replacement cost value, where your insurance will pay to fix your home with similar materials, but those similar materials can also be cheaper. This can allow you to replace your home without exceeding your dwelling limits.

Extended Replacement Cost Value

With extended replacement cost value, if your home is destroyed, your policy will actually pay more than your coverage limit for your dwelling to replace it. It will allow you to exceed a specific percentage of your dwelling coverage, allowing for flexibility if it costs more to rebuild your home than you think it will.

Guaranteed Replacement Cost Value

Finally, you can pay for guaranteed replacement cost value, which will pay to rebuild your home as-is fully, regardless of what it costs or what your policy limits are. This can be an expensive type of coverage to obtain and isn't something that every insurance provider supports.

When it comes to homeowner's insurance, it is crucial to understand your different dwelling coverage options so that you can choose the best one for your situation. Contact a local home insurance company, such as Binyon Agency, to learn more.