Homeowners Insurance Formula for Estimating Personal Property Value

When calculating the amount of coverage for each homeowner's personal property, home insurers rely on data-rich variables. These variables include the depreciated worth of an item, the cost of replacement, and specific policy options. However, house insurance often covers your personal items for 50% or 75% of the value of your home. Therefore, if you have $100,000 or $150,000 in homes insurance, your personal property is insured for up to $100,000 or $150,000.

Even if the real worth of your personal property is significantly less than the insured value, most home insurers will not underwrite a premium for less than 50% of the insured value of your home.

The Coverage of the Contents

Personal property claims under standard homeowner policies are paid at actual cash value, which is the replacement cost of your property in its present used condition. You can purchase complete replacement cost coverage for 10% to 15% more than the cost of basic insurance. This form of coverage reimburses you for the complete cost of replacing the item, less your deductible.

Homeowner policies cover personal goods referred to as "the contents" of the residence. The coverage covers your personal belongings, such as furniture, appliances, jewelry, and clothing, even if they are not physically present in your home. Unless specifically excluded, homeowners insurance typically covers all of your assets. Vehicles including cars and airplanes, pets, and car radios are all considered standard exclusions. Check your policy's fine print for any further exclusions.

Calculating the True Value

After inventorying your personal property, you must ascertain its true value. Actual value considers the wear and tear that results in the depreciation or loss of worth of a used item over time. To get an item's actual cash value or ACV, multiply the replacement cash value or RCV, the cost of purchasing the item now, by the depreciation rate, or DPR, expressed as a percentage, and the item's age.

Subtract that value from the RCV value. ACV = RCV (RCVDPRAGE). For instance, a three-year-old dishwasher that costs $500 (ACV) to replace and depreciates at a rate of 12.5 percent (DPR), or.125, has an actual cash worth of $312.50 500-[500(.125)3]=312.50 You can search online calculators for homeowners' depreciation to assist you with this.

Verification of the Replacement Value

If you desire more than your policy's cash value, you must add an endorsement or special option to it. The insurance reimburses you for the cost of replacing the item, less your deductible. The deductible is the portion of the loss you pay before the insurance company pays the remainder of the claim. Thus, in the above example, you receive $500 less your deductible toward purchasing a new dishwasher.

Increasing Benefits Payments

Replacement value benefits typically add from 10% to 15% to the cost of your premium, but some policies include them for free. This may make sense if you have many newly acquired things. Otherwise, the expense of the increased premium may outweigh the endorsement advantage. Additionally, Consumers' Checkbook reports that the insurer may not exceed a 70 percent coverage limit on your personal goods if you choose replacement value.