What the heck is replacement cost?
We have received a lot of questions lately from new homebuyers about the concept of Replacement Cost. Questions that sound like “Why do I need to insure my house for more than the amount I paid for it?” and “How did you come up with that specific dollar amount for the insurance on my home?” It can be a difficult concept to grasp at first – besides first-time homebuyers just spent a lot of resources and energy to come up with what they feel is the precise value for their home.
Replacement Cost essentially means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. Very rarely does the cost of the materials it takes to build a house equal the fair market value of the home. Often this is because the cost of new materials are higher now than they were at the time the home was originally built, even if those materials are of the same quality. This brings us to the concept of “Actual Cash Value” which considers the depreciation of the home over time into account. Insuring your home for Actual Cash Value may save on premium but can also leave a house dangerously underinsured in case of a significant loss.
Some insurance carriers have their own calculation for determining replacement cost. Others use formulas provided by independent appraisal firms such as Marshall & Swift. These formulas consider square footage, building materials, building age, and various other factors to determine replacement cost for the entire house. If you’re interested in what goes into determining replacement cost or are confused as to why the replacement cost on your home seems higher than it should be – we encourage you to check out Marshall & Swift’s website to better understand how insurance carriers determine the true value of your home. The better educated you are as a homeowner, the more confident you will feel that your home is insured properly.
Do you know what a deductible is?
Based on a new report from researchers at the USC Schaeffer Center for Health Policy and Economics and the USC Dornisife Center for Economic and Social Research, 42% of Americans do not understand what the insurance term “deductible” means. Furthermore, only 38% of Americans know the difference between a HMO and a PPO. So let’s use this opportunity to educate and empower people to better understand some basic terms in their relationship to health insurance.
Deductible: Your deductible is the amount of your medical costs that you have to pay before your health insurance takes over the remainder of the payment. For example, let’s say your deductible is $1000. If you require some medical care throughout the year that costs less than $1000 – you are responsible for the entire payment. However, if you have a significant injury or illness that necessitates more care – you will pay your $1000 deductible while your insurance company will pay most if not all of the remaining costs. But remember, even after paying your full deductible, most insurers require a copayment for various healthcare services.
Copayment: A copayment, or copay, is what you pay when you visit the doctor. This is a small payment to share the costs of your healthcare with your insurance company. Copays vary by policy, and can change if you see a specialist instead of a regular doctor, or seek treatment out of your provider’s network.
HMO vs. PPO
The biggest difference between an HMO and a PPO is that an HMO allows you to see doctors only within the HMO’s network of hospitals. With a PPO, you can see any doctor you choose but coverage is greater for certain providers (doctors, hospitals and other healthcare service providers) that the PPO has contracted with. Seeing doctors outside of the PPO network results in higher out-of-pocket costs like copays and coinsurance. Insurance premiums are generally higher for a PPO compared to HMO.
A health maintenance organization (HMO) is a type of managed care organization (MCO) that provides a form of health insurance coverage in the United States that is fulfilled through hospitals, doctors, and other providers with which the HMO has a contract. Under this model, providers contract with an HMO to receive more patients and in return usually agree to provide services at a discount. This arrangement allows the HMO to charge a lower monthly premium, which is an advantage over indemnity insurance, provided that its members are willing to abide by the additional restrictions
PPO means Preferred Provider Organization, a health care plan that provides covered services at a discounted cost for subscribers who use network health care providers. PPOs also provide coverage for services rendered by health care providers who are not part of the PPO network; the subscriber generally pays a greater portion of the cost for such services. Usually, a PPO will pay a greater percentage of the cost for a preferred provider, and less for a non-preferred provider.