Replacement Cost Versus Actual Cash Value: Home Insurance Policy Terms Explained

home insurance

The term “home insurance” suggests the comforting idea that even if something terrible happens to the home, you’ll be covered. After all, you have “insurance.” However, as soon as you get into the nitty-gritty, you’ll find that there are major differences in terms which may look alike at first glance.

You should know what exactly your home insurance policy does and doesn’t cover, so let’s review the difference between two common terms: replacement cost and actual cash value.

What Does Replacement Cost Mean?

When you first buy home insurance, you may have the option of insuring your property at the replacement cost. There are strengths and weaknesses, so the ideal thing is to learn what they are and then review and calculate what works best for you.

If you opt for replacement cost, your claim will cover the cost to replace the damaged items with something of similar like kind and quality. There won’t be any depreciation, meaning the insurance company will give you what you’d need to buy a television with similar features without a percentage of the value deducted to account for the age of the television.

If you spent $500 on a TV in 2014, you might not get exactly that amount today, but you’ll get enough to buy a TV with the same pixel quality and features. The goal of “replacement cost” is to substitute the object that got damaged or destroyed with a comparable one, not pay out the same amount you initially paid for it.

These premiums tend to be more expensive than actual cashvalue policies.

What Does Actual Cash Value Mean?

If you opt for home insurance based on actual cash value, the insurance company will factor in depreciation when determining the settlement amount. For example, if you paid $500 for a TV in 2014, you might get only $100 for it since the price of TVs has dropped so much and thin, smart TVs are everywhere.

If the television is 10 years old, the insurer will apply a high depreciation rate, for example, somewhere between 40-70%, and you are left with a significantly lower amount to “replace” your item. Ultimately, this leaves you in a position where you cannot replace all your items with the settlement funds you receive.

These policies tend to be less expensive.

Which is Best?

Everybody’s lifestyle and budget are different. The best option for you depends on these factors. Whichever you choose, following a few tips can really help you out.

For example, keeping receipts for large, expensive items is great if you have replacement cost insurance because the insurance company will offer you an initial payment for the actual cash value incurred then, if you replace and prove its value promptly, you can claim the difference up to the full value as long as it is determined to be of similar like kind and quality.

If you’re still a little confused and wondering who should you hire for help, an insurance lawyer will stay by your side throughout the whole process to ensure the claim is submitted properly and that you receive all you’re entitled to. Their role is in contrast to the insurance adjuster, who works for the insurance company and is often incentivized to find ways to pay you less.

An insurance lawyer can help you through the difficult process of obtaining a fair content settlement and can negotiate on your behalf with the insurer so that you get all the benefits your policy allows. Insurance lawyers can also help you submit your content claim and ensure that the value the insurer assigns, whether it is based on the replacement cost or the actual cash value, is accurate.

Insurance lawyers can maximize your claim no matter what type of insurance you have, and they’ll also make the process more streamlined and less aggravating.

Home insurance lets you enjoy peace of mind regarding the most expensive purchase you’ll ever make. Just ensure you understand the terms of your policy and get what’s right for you.

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