If your personal property is stolen, or gets damaged or destroyed by a covered peril, your homeowners insurance policy will compensate you for your loss. Depending on whether you have a homeowners insurance policy with replacement cost or actual cash value coverage, the amount you receive may or may not be enough for you to purchase a new item of similar quality.
What’s the Difference Between Replacement Cost and Actual Cash Value?
A homeowners insurance policy with replacement cost coverage will pay you enough money to replace a damaged, destroyed or stolen item with a new one of similar quality after you meet your deductible. Replacement cost coverage is generally the best coverage option since it can make you whole after a loss.
Actual cash value coverage takes depreciation based on age and wear and tear into consideration. Insurance companies calculate depreciation in a variety of ways.
If an expensive item is damaged or destroyed, you purchased it several years ago and you have an actual cash value policy, you’ll only receive a fraction of the amount you paid for it. If you want to replace it with a new item of comparable quality, you’ll have to come up with the difference.
Which Type of Coverage Should You Choose?
The premiums for a homeowners insurance policy with replacement cost coverage are typically higher than the rates for an actual cash value policy. Even though you’ll pay more for replacement cost coverage, it can be money well spent. That’s because the insurer will pay out more if you file a claim on a replacement cost policy than on an actual cash value policy.
If your house gets damaged or destroyed by a covered peril and you lose several expensive possessions, a policy with replacement cost coverage will give you enough money to purchase new items. If your home suffers severe damage and you have to replace several costly belongings, an actual cash value policy will only give you a portion of the money you need. You’ll have to find a way to pay the difference yourself, buy new items of lesser quality or save up the money to replace them later.
Do You Have the Right Homeowners Insurance Coverage?
If you aren’t sure which type of coverage you currently have, check your policy or contact your homeowners insurance company or agent. If you have actual cash value coverage, ask how much it would cost to switch to a replacement cost policy. If you can afford the higher premium, you’re better off going with a replacement cost policy because it can give you peace of mind.
You should also check on your coverage limits. Your insurance policy will only cover property replacement up to that amount. If you have expensive belongings, such as jewelry or artwork, you may need scheduled personal property coverage to make sure that you have adequate financial protection.
Compare rates from different companies. You may be able to get better coverage at an affordable rate by switching insurers.
