Actual Cash Value vs. Replacement Cost—What’s the Difference?

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Actual Cash Value vs. Replacement Cost—What’s the Difference? on avanteinsurance.com

Choose the coverage that’s right for you

When you purchase insurance, it’s important to understand exactly how your policies work. But like many other professional fields, insurance jargon can be confusing and difficult for folks outside of the industry to understand. With that in mind, here’s a look at two terms that a lot of people aren’t familiar with:

What is actual cash value?

When you have an insurance policy that is based on actual cash value, you will receive payment on claims based on the cost of replacing the same item or possession at the actual value including depreciation. So for example, if your home was damaged in a fire and you lost your 10-year-old television, your actual cash value policy would pay for the cost of replacing it at the amount it’s worth today; not the value of a brand new TV set.

What is replacement cost?

A replacement cost policy differs from an actual cash value policy in that when you make a claim, you would be covered for the cost to replace whatever possessions were damaged, destroyed, or stolen. The amount that you would receive would cover the replacement cost at the current value versus what you paid for it.

What are the benefits of each?

Although it may seem like you should always choose a replacement cost policy, actual cash value coverage can be beneficial because these types of policies often have lower monthly premiums.

When you choose replacement cost coverage, you will, in most cases, receive more in terms of payout because your insurer does not factor in depreciation. So when your camera or laptop is stolen or destroyed, for example, you will receive the amount necessary to replace the item at the current market value. However, there are instances where even replacement cost will not cover the total amount necessary to replace property including antiques, family heirlooms, or rare items. This is because there are often caps on per-item claims.

Just like actual cash value policies account for depreciation, replacement cost coverage will not factor in appreciation of items that many have gone up in value since you purchased them.

It’s advisable that if you consider purchasing riders or a separate policy altogether to cover those items that are extremely valuable, rare, or simply irreplaceable.

When selecting homeowner’s, renters, commercial coverage, or auto insurance, it’s important to go over exactly what type of policy you are purchasing. Although you should always look for the best value and the lowest premiums possible, remember that the cost of a policy is a direct reflection of the amount of protection you’ll have. So in some cases, especially when it comes to your personal belongings or property, you may opt to spend a little more on monthly premiums to ensure that you are able to afford replacements in the event of a total loss.

For guidance on the ideal insurance solutions to suit your needs, give us a call at 305-648-7070 or fill out our quote request form and we’ll be happy to assist you.