You may already know that it’s important to insure anything that’s valuable to you. But do you know what kind of insurance is best?
This article will focus on a particular type of insurance called agreed value insurance. We’ll also take a look at agreed value insurance compared with other types of insurance.
Read on to learn the difference so you can decide what kind of insurance policy is best for you.
Agreed Value Insurance
To help you understand your insurance options, let’s start with an overview of agreed value insurance.
With this type of policy, the policyholder and the insurance company have agreed to the value of the insured item. That’s great if you ever need to replace the item. You’re already guaranteed to receive the agreed value.
With other types of insurance policies, you and your insurer may not agree on the value of the item. That actually provides some benefits, outlined below. But in the event of a loss, you may be compensated less than what you expect.
Another aspect of agreed value insurance is that there is no depreciation during the term of the insurance policy. Because the insurance company agrees to the value before the policy takes effect, the agreed value can only change during a re-appraisal. A re-appraisal happens between policy term renewals.
As explained below, an agreed value policy may mean higher premiums through the life of your policy. So it’s not always the most economical—but your higher premium means less risk of being under-compensated. As such, it’s better for high-dollar items or items that are unique or hard to replace.
One example is agreed value auto insurance. This type of agreed value cover is great if you want to have a stronger stake in determining the value of your vehicle policy—or if your vehicle is highly customized.
Agreed Value vs. Actual Cash Value
With agreed value cover, you’re able to factor in replacement costs. Also, there is no depreciation during the life of your insurance policy.
By contrast, an actual cash value policy does not include replacement costs. It only covers the bottom-line value minus the depreciation rate. The depreciation rate itself is determined by assessing the expected lifetime of the item being insured. The remaining lifetime is then taken into consideration at the time that an insurance claim is made on the item.
Agreed Value vs. Stated Value
A stated value insurance policy is based on the value of your item as stated by you. As opposed to an agreed value policy, the insurance company doesn’t have to agree with the value you’ve stated. In practice, the insurance company will usually pay out the less of either your stated value or the actual cash value—which they determine at their discretion.
That may sound like a bad deal, but there are some benefits. For example, you may not expect much of a hassle should you need to replace your insured item. That means you can state the value at lower than the cash value—and thereby lower your premiums.
Of course, that also means that if you do need to cash in your policy, you would likely receive less than the actual cash value of your property. Stated value coverage thus includes some risk of underpayment, in exchange for a lower premium.
The Big Deal
In the end, the type of insurance you need depends on how much control you want in determining the value of your property. Agreed value cover is best for hard-to-replace items and high-dollar items. That’s because typical insurance policies don’t account for special considerations.
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