What is the Difference Between Replacement Cost and Actual Cash Value Coverage?

You are in the market for homeowners insurance, but you realize there are different options to choose from. When it comes to replacing damaged or stolen items, you will come across two main choices for coverage: replacement cost and actual cash value coverage.

You will want to ensure you have adequate insurance to cover your home in the case of an unexpected event, but what do these options mean for you as a homeowner? These options refer to how much the insurance company will pay, and ultimately, how much you will receive when a covered event occurs. Here is a look at the differences between replacement cost and actual cash value coverage.

Replacement Cost Coverage

This type of coverage pays to replace the damaged or destroyed item with a new item of similar kind and quality, without factoring in depreciation. You get enough money to buy a brand-new replacement, even if your old item has lost value over time.

For example, if your five-year-old roof is destroyed in a storm and it would cost $15,000 to install a new roof today, replacement cost coverage will pay the full $15,000, regardless of the roof’s age or wear.

Actual Cash Value Coverage

This type of coverage pays the current value of the item, taking depreciation into account. You are compensated for what the item is worth today, not what it would cost to replace it new.

Using the same roof scenario, if your five-year-old roof has depreciated to 50% of its original value, actual cash value coverage would pay only $7,500. You would have to cover the rest to replace it with a new one.

Which Should You Choose?

In your insurance policy, you may see both actual cash value and replacement cost coverage, depending on the type of property being insured. Homes are usually covered on a replacement cost basis, while personal belongings like electronics, furniture, and clothing are often covered by actual cash value by default.

Replacement cost coverage generally comes with higher premiums because it offers more complete protection. The advantage is that it allows homeowners to replace damaged or lost items without having to pay out of pocket.

If you’re unsure which coverage is right for you, consider how much you would save on premiums versus the potential out-of-pocket costs after a major loss. In some cases, the premium savings from actual cash value coverage may be offset if a claim payout is not enough to fully replace your belongings.

Contact Us Today

Homeowners insurance does not cover everything, so make sure you have the coverage you need for your most prized possession: your home.

At Hartman Insurance Agency, Inc., we make the insurance buying process easy. Our Saline, Michigan, agents are knowledgeable and experienced in protecting your home. We will help you find the best policy to fit your needs. Schedule a consultation today by contacting us via (734) 999-4190 or online here.