Understanding Actual Cash Value and Replacement Cost

Actual cash value and replacement value mean very different things when it comes to insurance coverage. If you were to suffer a catastrophic loss, you could find yourself with a serious shortfall if your insurance policy only covers actual cash value. Replacement cost gives you much more comprehensive coverage.

Understanding your insurance coverage before you have a major loss is important. Dealing with a loss is stressful enough without finding out that your coverage isn’t exactly what you thought it was. At Nicholas/Tobin Insurance, we feel strongly about helping you make informed decisions about your insurance coverage. We’re happy to explain your policy, as well as offer advice on coverage changes.

Let’s talk about how you’d be paid if you had a homeowner’s claim for a total loss. The limits listed on your policy don’t actually indicate how much you’d be paid in the event of a loss. They are simply the maximum of how much you could be paid.

What you really need to understand is the difference between actual cash value and replacement cost and what type of insurance you have.

Actual cash value versus replacement cost

Actual cash value is the value of the property at the time of the loss. It does not reimburse you with the funds you would need to replace the item. Rather, it will cover you at the depreciated cost, which is closer to what you could buy it from a tag sale.

Replacement cost reimburses you what it would cost to replace the items lost with comparable property. The insurer doesn’t look at depreciation in this case.

While actual cost value insurance is less expensive, replacement cost is advantageous to the homeowner in the event of a catastrophic loss. Let’s say you had a house fire and your home, and the contents, was totally destroyed. Replacement cost would cover the cost to replace the contents of your home at current market value as well as the cost to rebuild a comparable home.  Actual cash value would reimburse you for the contents of your home – as well as your home itself — at a depreciated rate, closer to the price that you could sell that item at a tag sale or on Craigslist.

In the event of a loss where you had to replace most of the contents of your home, or your home itself, actual cash value coverage would leave you with a large financial shortfall.

Documentation needed for replacement cost

We suggest having a good home inventory. While that sounds daunting, it’s actually much easier to document your personal belongings than you might think. You’ll need a list of big ticket items. You should include make and model, purchase dates, price, receipts and photos, as well as what it would cost to replace those items. You may find that certain things can’t be replaced with the exact same item. Manufacturers often replace items with new models. In this case, you should list a similar replacement equivalent and its value.

Items not covered by replacement cost

You may need a separate rider to cover expensive jewelry, collectibles, antiques (including antique cars), and fine art. If you own this type of property, discuss it with your insurance professional at Nicholas/Tobin Insurance to make sure these items are insured properly. Replacement cost won’t cover high value items like this at their full monetary worth.

Make sure you understand the difference between actual cash value and replacement cost. If you aren’t sure what type of coverage you have, give your insurance professional at Nicholas/Tobin Insurance a call!

Nicholas / Tobin Insurance, located in New Milford, Connecticut, provides its clients the highest quality insurance products and services available today to protect them, their families, and businesses. We offer homeowners insurance, renter’s insurance, car insurance, business insurance, travel insurance and more! Our commitment to service means our team of licensed insurance professionals is here to help with simple policy questions, consult with you to determine appropriate coverages and be available 24/7 when trouble strikes, and you need assistance managing through the claim process.

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