Actual-cash-value-versus-replacement cost

According to a recent survey conducted by a major insurance provider, it’s estimated that nearly one-half of homeowner’s insurance policyholders are unclear about actual cash value versus replacement cost claims payments as they relate to their homeowner’s insurance coverage. There are different methods by which insurance companies may calculate claims payment amounts to compensate you for a covered loss. One type of payment calculation is called “actual cash value,” while the other is known as “replacement cost value.”

The method your policy uses to pay claims is determined at the time the coverage is taken out and this information will typically be stated on your policy’s declarations page. To help give you a clearer understanding of actual cash value versus replacement cost, consider the following:

    1. If an item covered by your homeowner’s insurance policy is lost (stolen), damaged or destroyed by a covered peril, replacement cost coverage will pay you an amount equal to what would be required to replace that item with one of the same or similar quality, design, function, etc. This could be something as simple as a small item like a camera or something as large as your entire house and all its contents.
    2. Items covered by actual cash value are paid considering their initial cost or market value minus depreciation (wear and tear) experienced throughout the years you’ve owned the item. A five-year-old television set, for example, may only be paid at 50% of the cost required to replace it since the useable life expectancy of a television may be determined by the insurer to be only ten years.
    3. The main difference between replacement cost coverage and actual cash value coverage is “depreciation.” Property devalues as it ages, causing replacement cost coverage to typically provide higher claims payouts than actual cash value coverage.
    4. With actual cash value coverage, you won’t be able to go out and buy an item of similar value to the item you lost without coming up with money out of your pocket. Trying to rebuild your home and its contents on an actual cash basis will leave you at a serious loss. This is actually preferred by the insurance company, since their payoff amount will be less than a claim for replacement cost.

Obviously, the cost of replacement cost coverage is greater than that of actual cash value, since the benefits are greater. Less risk equals greater premium payments.