It’s a loaded question, but it is key to understanding the difference between replacement cost and actual cash value. The answer also will help you determine what type of coverage is right for you and your family.
Our Insurance Definitions Cheat Sheet
Replacement Cost Coverage = reimburses you for the cost of your home today
Actual Cash Value Coverage = reimburses you for the cost of your home today – depreciation
The trick is to remember the Actual Cash Value of an item is based on its depreciated value. Depreciation is the reduction of the value of an item due to factors such as use, age, and type of product. This may mean the item’s price today is more than what a policy with actual cash value coverage will reimburse.
Replacement Cost vs. Actual Cash Value Real-life Examples
When Ed’s 20+ year-old barn collapsed following a severe Wisconsin snowstorm, his actual cash value coverage reimbursed him for the cost of the barn minus depreciation. He received less than what it cost to build a completely new barn today due to the years of wear and tear on the original barn.
Ed’s barn wasn’t the only thing to take a hit during the blizzard. Ed’s neighbor, Judy, experienced an unexpected roof collapse at her recently constructed home. Luckily, Judy’s replacement cost policy covered the entire cost of repair for a new roof using the same materials as before without deducting for depreciation. Judy replaced her roof at today’s price and only had to pay her deductible.
Typically, homeowners insurance policies include replacement cost coverage for the structure of the home. If you have an older home or barn like Ed, you may need modified replacement cost coverage to account for using newer, alternative materials for repairs.
What would it cost to replace everything and build new today?
No matter what coverage you choose, it’s important to document your answer to the question above—“What would it cost to replace everything and build new today?”—it will save you time and money if you ever have to file a claim. Be sure to include square footage and personal property in your estimate. Any collectable items, such as artwork or sports memorabilia, should be listed separately. Your answer may change over time as well due to changing building costs in your area, or from potential home updates or renovations HGTV inspires you to do!
For more information on replacement cost coverage and actual cash value coverage, please contact your local agent today. We’re here to help you choose the protection that is right for you.
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