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New Mexico State University

New Mexico State University

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Home Insurance Tips for Consumers

LAS CRUCES -- Homeowners who know what kind of insurance coverage they need may be able to save money on their monthly premiums, said a consumer education specialist with New Mexico State University.


Homeowners can choose between two types of coverage, said Susan Wright with NMSU's Cooperative Extension Service. The two choices for insuring personal property and contents of the house are actual cash value and replacement cost.

Actual cash value covers the contents of a home for the original value of any item, less a deduction for depreciation, age, or wear and tear. The insurance company will pay the cash value of the item at the time of the loss, Wright said. For example, a sofa that was purchased five years ago for $1,000 may have a cash value of only $500, because of depreciation. If destroyed, the insurance company would only pay $500, even if it costs as much as $1,500 to replace the sofa.

With replacement cost coverage on home contents, the homeowner is reimbursed for the amount necessary to replace the destroyed item with one of the same type and quality, Wright said. This coverage is more expensive than actual cash value coverage.

Insurance companies usually require an amount of insurance equal to at least 80 percent of the full-replacement value of the home.

"Valuable antiques and other expensive items need to be appraised and insured separately regardless of the type of replacement coverage selected," Wright said.

When determining the full replacement cost of a home, figure the actual cost of building a home of the same type and quality, she said. This cost is not its market value or selling price. Depending on the real estate market, the selling or market price could be higher or lower than the cost of replacing the home. Insurance agents can help figure replacement costs for dwellings.

"To have full replacement cost for a home that costs $120,000 to build and its contents, coverage must be at least $96,000," Wright said. "An inflation rider is usually available for an extra charge to provide automatic increases in coverage to keep pace with inflation. This will keep insurance coverage up-to-date and prevent future problems with being underinsured."

If the coverage is not for the full 80 percent or more, only a portion of the loss would be covered, depending on the percentage of coverage that was purchased. Inadequate coverage can prove to be very costly in the event of a loss.

Wright said homeowners should shop around for coverage and keep it up-to-date. "Contact your insurance agent for a review of your coverage, if you're unsure about the amount and type of coverage you now have," she said.