Coverage for Loss of Buildings

You can choose from these two types of policies to protect you from catastrophic loss:

• Cash value: In this basic coverage, your policy will repay you for the cost of replacing your property, a value you agree upon with the insurance company, minus depreciation. This is the standard, least expensive kind of policy.

• Replacement value: This coverage, which is more expensive than cash value coverage, pays the cost of replacing the property. If you lose your property, you will be compensated with a payment that is closer to the value of the property if you sold it. This coverage, though more expensive, offers better protection from catastrophic loss.

Be aware that some properties can be difficult, if not impossible, to insure. Insurance underwriters might not cover waterfront property that has suffered water damage in the past or an old home in an earthquake zone. Therefore, it is very important to speak with insurance agents, possibly several of them, before moving too far ahead with your plans to purchase a property. The cost of insuring high-risk properties can be prohibitive. Before you buy, you need to weigh the costs and benefits when you calculate your expenses and profits.

Be aware, too, that certain types of renovations, like adding a sprinkler system or a fire alarm to a commercial property, can reduce insurance premiums. The bottom line is knowing your insurance expenses before buying a property — and taking steps to reduce those costs — can make the different between a property that is profitable and one that is not.

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