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Getting the Most From Your Insurance Claim: Replacement Cost vs. Actual Cash Value Insurance Coverage

Homeowners insurance provides several endorsements and options you can add to your policy.  Most of them come with an additional premium, but in my opinion, there are several that are well worth the cost.  Increasing your coverage to replacement cost instead of actual cash value is one of those options I include on most policies.

The difference between the two coverage options is the amount of money you would receive in a claim.

Replacement cost: Your claim would replace property with property of like kind and quality, at todays’ prices.

Actual cash value: Your claim would pay the cost for an item at replacement cost less depreciated.  The rate of depreciation depends on the item.  An example would be 5% or 10% depreciation each year.

Here are some examples with items purchased on January 2013 and are damaged in fire 8 years later:

Replacement Cost$1,000$500$13,000
Actual Cash Value$200$100$7,800

TV: When I talk to clients about replacement cost coverage, TVs always get brought up.  Even though the cost to buy a similar TV may be less now than it was when you bought it, you would still receive more on a replacement cost basis.

Roof: Some insurance companies are only offering to cover the roof of a home or may have changed your coverage during an annual renewal on an actual cash value basis.  Not all insurance providers have done this, so it might be worth getting some insurance quotes to see if there is a company that will insure the roof on a replacement cost basis.

Dwelling and Other Structures coverage on your homeowners policy is typically covered as replacement cost.  Personal property may default to actual cash value.  Having actual cash value coverage can result in a significantly less insurance claim payout compared to replacement cost.

It is important to review your policy and know what coverages you have.  Also note that the coverage limits on your policy are the most your insurance will pay and not the guaranteed amount.  If you have actual cash value coverage and lose everything, you will still have to work with the insurance company to determine how much money you will receive – you will not just get the amount listed on the policy.

To your financial success,