Actual Cash Value Vs. Replacement Cost: Which One Will Pay Your Entire Claim?

A standard homeowners insurance policy provides various coverage options, including personal property coverage and dwelling coverage. It safeguards your personal property against loss or damage caused by a covered event such as fire, vandalism, and certain natural disasters. The payout typically depends on the stated coverage limits and the type of coverage.

What Does Replacement Cost Mean?

As the name implies, replacement cost is the amount of money needed to replace damaged or destroyed property with similar or same property in the current market. It is important to note that the replacement cost can be higher or lower than the original cost of the property in question because of market forces.

What Is the Actual Cash Value?

Your belongings can either appreciate or depreciate with time. For instance, valuables such as jewelry can gain value over time, while a piece of furniture will likely depreciate. Actual cash value refers to the total market value of a property at the time of damage.

Replacement Cost Insurance Vs. Actual Cash Value Insurance

While over 90% of American households are insured, about 65% are underinsured. The type of coverage you choose will determine if you’re fully or partially insured. Replacement cost insurance is a policy that covers the total cost of replacing the items damaged in a covered peril. Here, the insurance company reimburses you enough to get a brand-new version of every covered item regardless of the depreciation or appreciation. If, for example, the television you bought six years ago at $600 gets vandalized, replacement cost insurance will cover the cost of buying a similar new television, even if it now costs $800. On the other hand, actual cash value insurance only covers the market value of the damaged property at the time of the damage. For instance, if the designer suit you bought four years ago is destroyed by fire, actual cash value insurance will cover the initial purchase price minus depreciation.

Should I Get Replacement Cost Insurance or Actual Cash Value Insurance?

If you have the money to pay for property damage out of pocket, then actual cash value insurance will work just fine. However, if you don’t have any savings or assets, you may want to go for replacement cost insurance, as this will relieve the burden of paying for replacements out of pocket in case of a loss.

What Is Extended or Guaranteed Replacement Cost?

Like other coverage options, replacement cost insurance has coverage limits. This means that in case the cost of replacing a damaged property surpasses the policy limits, you will have some amount left to pay out of pocket. That’s where extended or guaranteed replacement cost comes in handy. It extends your replacement cost coverage limits by a certain percentage to help cover the additional replacement costs.

How to Buy Replacement Cost or Actual Cash Value Insurance

Due to the nature of coverage, replacement cost insurance policies are typically more expensive than actual cash value policies. To get your desired coverage, talk to a reputable insurance agent who can lead you through the process. Note that the amount of coverage needed should depend on your items. Hence, inform the insurance agent if you have valuable jewelry, firearms, artwork, collectibles, and precious metals.

Get the Right Insurance Policy with the Help of Singh Agency

Before purchasing a homeowners insurance policy, you should first determine whether you need actual cash value or replacement cost insurance. At Singh Agency, we will help you find a homeowners insurance policy that suits your needs and budget. So call us at (516) 605-1010 to get started today!