The Difference Between Replacement Cost and Actual Cost Value

replacement cost and actual cost home insuranceTaking a closer look at home insurance replacement cost and actual cost value

When purchasing home insurance, you will be given the option to choose which type of replacement policy is the best suited for your needs, a replacement cost policy or an actual cost value policy. It is important to understand the difference between the two policies to ensure you are getting the coverage that is going to fit into your budget as well as provide sufficient coverage for you home and personal belongings.

Replacement Cost

Replacement cost means if there is damage to the property, the cost of replacement materials used is comparable to the cost of new materials of the same quality and used for the same purpose. In other words, there will not be a reduction in value due to depreciation of the items being replaced. The actual cost to replace damaged items must be equal to or greater than the limit put in place by the insurance company. For example, if the entire roof is damaged, after you pay the deductible, the insurance policy will cover the remaining cost for a new roof.

Actual Cost Value

An actual cost value policy, also known as market value policy, covers the cost to replaced damaged items at their depreciation value. Which means the value, or cash amount, the merchandise would be worth if you sold it. For example, if you paid $1,000 for a stereo system you bought 5 years ago, but it was only worth $200 at the time of your insurance claim, the insurance company would only cover $200 as opposed to the actual cost to replace the stereo system. The insurance company will determine depreciated value based on various factors such as age and wear and tear on the item.

Home Insurance Additional Protection

The primary difference between the two replacement policies is the deduction and value of depreciation. Both forms of replacement policies use a cost value that is based on the current cost to replace the damaged property. Additional protection is available to compensate for the additional cost of replacement. Although there are several additional protection options available, three of the most common policies include:

Extended replacement cost coverage which insures your property for a specified value as well as an additional 20-25% extended limit in case the costs for reconstruction are more than the actual cost value or replacement value.

Guaranteed replacement cost coverage pays the full cost to rebuild the home as long as the requirements of your home insurance policy have been met.

Inflation Guard will help you maintain adequate coverage to replace the home in case of loss by increasing the amount of home owners insurance in order to stay current with inflation.

When buying a homeowners insurance policy, although an actual cost value policy is typically less expensive, replacement cost policies are the most common choice, because there is less risk involved as far as reimbursement for replacing your damaged items. It is recommended that you speak with an experienced insurance agent to help determine which primary replacement policy, and any additional protection policies, would be best suited for your needs.

Stephen Catalano is an insurance consultant. He mainly writes for personal finance blogs where he enjoys passing on his insights. Comparing homeowners insurance rates can save you time and money, visit the link.

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