Many people do not fully understand how insurance works. They may understand the basic principles, but they might have questions and confusion about the rest. Home insurance is one type of insurance product you can buy. Did you know that you can purchase three different levels, though? Many people do not realize this or understand how it works. If you would like to learn more about the different levels of home insurance, continue reading.

The First Level of Coverage: Actual Cash Value

When you purchase a home insurance plan, the agent might tell you about the three levels of coverage you can get. The first level is called actual cash value (ACV). When you choose this level, you receive the lowest prices on your insurance policy. However, you also receive the least amount of coverage because this level of coverage bases compensation after a claim on the actual value of your things, taking depreciation into consideration. 

The Second Level of Coverage: Replacement Cost

The next level is called replacement cost, and this level is a step up from the ACV level. When you have a policy with replacement cost coverage, you will receive compensation equal to the amount you must spend to replace your things. The unique thing about this method is that it does not factor in the actual value of the items or depreciation. It only considers the money needed to replace items lost after a claim. You will pay higher rates for this coverage compared to ACV, but you may also receive more money after a claim if you have this method.

The Third Level of Coverage: Extended Replacement Cost

Finally, you can pay extra to have a third level of coverage, which is called extended replacement cost coverage. This coverage is the best and most comprehensive option available. This method provides compensation that is often greater than the cost needed to replace items. With extended replacement cost coverage, you will receive compensation to replace your items and then a little extra for other costs. While you must pay more to have this coverage, it is worthwhile if you ever have to file a claim.

These coverage options all come with pros and cons, so you should carefully choose the level you want.  If you have questions about these three levels of home insurance or questions about your other home insurance options, talk to your insurance agent today.