Actual Cash Value Or Replacement Cost? What’s The Difference?

Insurance Tips
21 Jun 2018

When shopping for Home Insurance, it’s important to understand what your policy covers and excludes, as well as the terms. Something that many may not be familiar with is how much you’ll receive if you suffer from a loss. When you first buy a policy, you’ll have the option to insure your property at Actual Cash Value or Replacement Cost. But, before you make your decision, it’s important to understand how each option may affect your premium and how much you’ll receive if you submit a claim.

Actual Cash Value

In the event of a loss, if your property is insured at Actual Cash Value and is damaged, you will not receive the amount that you originally paid. Instead, you’ll receive the amount that that your home and belongings would be worth at the time of the loss. Meaning deprecation is factored into your payment. For example, if you bought a television for $2000, and 7 years later it was only valued to be worth $800, you will most likely receive around $800 as that is its current worth. Not the original $2000 that you paid. This is important to understand because often, homeowners may choose to insure their property with this coverage as the premiums are usually lower. But insuring your property and your contents at this level comes with the possibility of receiving less.

Replacement Cost

If you purchase a Home Insurance policy that insures your property at Replacement Cost, the amount you receive will likely be the original amount you paid. Meaning, insuring your property at Replacement Cost will not take into consideration depreciation, it only focuses on what was spent on it. So if you suffered a loss and a television that you bought for $2000 was damaged, you would most likely receive the $2000 that you paid for it regardless of its age. While coverage options are generally the same for each insurance company, every situation and policy is different, so it’s important that you clarify the extent of your coverage before a loss. Doing this will allow you to increase or adjust your coverage if needed.

Proof Of Purchase

Regardless of how you choose to insure your property, it’s always recommended that you record your valuables before a loss. Taking photographs and keeping receipts are the best ways to move through the claiming process smoothly. If you keep records, you’ll be able to prove how much something was worth at a known time as well as its condition. This ensures that you receive the right amount after a claim.

If you have high-value items such as art pieces, jewelry or collectibles, it’s important that you speak with your insurance broker to discuss the best way to insure them. While some can be covered under your general Home Insurance policy, your insurance broker may suggest that you add them to your coverage as a floater or even purchase their own policy. Again, to ensure you’re appropriately reimbursed. While it may seem like it’ll be unlikely that you’ll actually need to use it, it’s always better to be protected and prepared.

Your Home Insurance policy is meant to protect you in the event of a loss. Make sure you understand what your policy covers so you aren’t caught off-guard when you try to file a claim. For more information about what option may best fit your unique needs or what your current coverage entails, contact your Waters Insurance broker today!