Question

Assume your 10-year old home originally cost $300,000. Unexpectedly, a fire totally destroys your home. Over the past 10 years, your home has increased in value by 20 percent and is now worth $360,000. Under the replacement value coverage, what will the insurance company pay you?

a) $300,000
b) $330,000
c) $360,000
d) $380,000

Answer 1

Under the replacement value coverage, the insurance company would pay $360,000 for the home that increased in value by 20 percent over 10 years.

Step-by-step explanation:

If a 10-year-old home originally cost $300,000 and increased in value by 20 percent, its new value would be $360,000. In a scenario where the home is totally destroyed by fire, and the homeowner has replacement value coverage, the insurance company would pay the cost of replacing the destroyed home with one of similar kind and quality, at current prices. Therefore, the insurance company will pay the current value of $360,000, which reflects the 20 percent increase in the home's value over the 10 years.

Answer 2

Under a replacement value coverage, the insurance company will pay out $360,000, which is the current value of the home after a 20% appreciation over 10 years.

Step-by-step explanation:

The question pertains to the calculation of insurance coverage under a replacement value policy for a home that has been totally destroyed by fire. If the original cost of the home was $300,000 and it has appreciated in value by 20% over 10 years, its current value would be $360,000. Replacement value coverage would generally pay out the current value of the home, not the original purchase price, to replace it with a similar property. Therefore, under a replacement value policy, the insurance company would pay out the current appreciated value of the home which is $360,000.