Imagine that your home was a total loss due to a fire. Would you want to be paid to replace everything with new items? Or, would you want to receive a check for the current market value of all your stuff?
Replacement Cost – If you’d like to be paid to replace everything with new items, you’d want to make sure you have replacement cost coverage on your home and personal belongings. It might cost a bit more, but you’ll also be paid more at the time of your claim.
Actual Cash Value – A less expensive option is to insure your items for actual cash value. This means that you would receive a check for the depreciated value of your items. So, if your television was purchased for $500 about 4 years ago, it has probably lost value. The insurance company will determine the average useful life of a television. Next, they will determine how much the value of your television goes down each year. Finally, they will subtract the loss in value from what you originally paid for it. In other words, you won’t receive the $500 you paid for it. The cost for actual cash value is less, but you also receive less money at the time of your insurance claim.
Generally, replacement cost coverage provides you enough money to replace belongings. Actual cash value coverage only pays you for the depreciated value of your items, so you will be stuck with some costs when replacing items. Check back next week and we will talk about options for replacement cost on your auto, motorcycle and boat policies.