After a disaster, one of the first and most confusing steps is to understand what your home insurance policy actually covers. The language can feel overwhelming in the best of times. When you’re stressed, it’s even more of a challenge. This brief primer should help you determine the insured value of your home, the kind of policy you have, and what your claims settlement will be based on.
What is the Insured Value of Your Home?
When you take out a home insurance policy, your insurance company determines what it would cost to make you whole if your home is damaged or destroyed. To get there, they run your home through a kind of reconstruction recipe: they estimate current labor and material costs and factor in your home’s size and layout. They include all the details that contribute to the quality of construction, such as custom cabinetry, upgraded flooring, specialty windows, or a new roof with higher-rated shingles. They build a similar estimate for your personal property and any detached structures. If you feel their estimate of insured value is too low, you can work with them to adjust that figure.
Additionally, it’s critical to alert your insurer after you do any remodeling. A kitchen renovation, solar installation, bathroom upgrade, or even new hardwood floors can shift the true rebuild cost by tens of thousands of dollars. If your insurance company doesn’t know about the upgrades, your dwelling coverage may be too low, leaving you underinsured.
What Kind of Policy Do You Have?
The following descriptions are generalized. Different insurance companies have their own clauses, terms, and exclusions that will affect the final payout. But this overview should be enough to help you set realistic expectations and plan your next steps. Once you have identified your policy type, it’s important to spend time with your insurance agent and have them explain the fine print of your policy.
Actual Cash Value (ACV) – Pays depreciated rebuild cost
ACV is based on the fair market value of your home and belongings at the time of the loss. The insurance company looks at what it would cost to rebuild your house today after deducting for age, wear, and tear.
Example:
- Your home would cost $350,000 to rebuild.
- Because it’s 20 years old, the insurer reduces for depreciation.
- Your payout could be as low as $220,000.
That means you wouldn’t get enough money to rebuild the same home unless you built it yourself or supplemented the cost with savings, loans, or other aid.
Key takeaway: ACV usually leaves a large financial gap between what you receive and what it costs to rebuild.
Replacement Cost Value (RCV) – Pays to rebuild as before
RCV covers the cost to rebuild your home as it was before the disaster, without subtracting for depreciation. This is the most common type of policy, and it generally comes much closer to making you whole again.
Example:
- Your home would cost $350,000 to rebuild.
- With RCV coverage, the insurer pays the full $350,000 (subject to your policy limits).
- You may also have an “extended replacement cost” rider, which adds 10–25% more coverage to help with inflation or spikes in material costs.
However, keep in mind: RCV may not automatically cover building code upgrades. If your old home didn’t meet current codes, you might face extra costs unless your policy includes an “ordinance or law” rider.
Key takeaway: RCV provides more coverage than ACV, but your total payout may not cover code upgrades or unexpected expenses.
Guaranteed Replacement Cost (GRC) – Pays whatever it costs to rebuild
This is the gold standard of coverage. GRC policies promise to pay whatever it takes to rebuild your home to its pre-disaster condition—even if that amount is higher than your policy limit. Unlike RCV, it also accounts for updated building codes, so you’re not stuck covering those upgrades out-of-pocket.
Example:
- Your home would cost $350,000 to rebuild.
- By the time you start building, materials and labor have skyrocketed, and now the cost is $450,000.
- With GRC coverage, your insurer pays the full $450,000, even if your original coverage limit was $350,000.
Key takeaway: GRC offers the most protection and peace of mind, but it’s less common and often more expensive. Full payout also assumes your insurer had the latest updates on any remodeling you did before the disaster and had adjusted your policy accordingly.
Final Thoughts
When you’re facing the loss of a home, knowing what your policy will (and won’t) cover is essential.
- ACV: lowest payout, often not enough to rebuild.
- RCV: covers rebuilding costs, but may leave gaps for code upgrades or rising prices.
- GRC: covers everything, including code upgrades and unexpected cost increases.
When you talk with your insurance agent, ask them to explain your policy in plain language. If you have additional questions, don’t be afraid to ask for clarification. Don’t ever let them rush you or make you feel like they are doing you a favor providing coverage. You are the customer who has paid for this service.
And remember—you don’t have to decide everything right away. Take time to understand every bit of your coverage and what it will take to rebuild your home and life before signing paperwork or accepting any settlement.