When you purchase homeowner’s insurance, you have a choice of valuations, cost or replacement value. Obviously,...

When you purchase homeowner’s insurance, you have a choice of valuations, cost or replacement value. Obviously, replacement value will be higher than cost value and will carry a higher premium. What criteria would you use to decide which to choose? Prioritize the criteria you identified and explain why you ordered them.

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Expert Solution

Replacement value insurance is for paying the complete replacement cost of the item, whereas, the cost value insurance is for only paying the depreciated value. With the replacement value the person shall have enough money for replacing the belongings. The payment based on the replacement value of the property is generally more favourable for compensating the person for the actual cost or the cost value of replacing the property. The replacement value is the value which would take the home to rebuild with the similar materials if the property is damaged or destroyed. The value comes tied up with the amount of the coverage which the owner selects and the amount which the insurer shall pay if the owner files the claim. The replacement cost only covers the total cost for rebuilding the property. Replacement value provides extra protection with the policies limit against the increase in labor and material cost. Therefore the replacement cost is better for the homeowner insurance coverage than the actual cost value as it restores the situation of the policyholder to what it was earlier at the time of occurrence of covered losses.

Rahul Sunny answered 1 year ago

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