Homeowners Insurance Replacement Cost Vs. Actual Cash Value Explained

Oct 07

When it comes to homeowners insurance, knowing the difference between replacement cost and actual cash value will help you to understand better what the coverage is of your policy and what deductions for depreciation apply. Both homeowners and tenants can shop for either, actual cash value coverage or replacement cost coverage, but while federal law requires that landlords insure their properties and tenants are partially protected, homeowners are left to make their own decision whether to have one or another insurance policy, or no insurance at all.

In brief, a homeowner’s insurance cash value policy will not replace your entire home and personal assets in case of natural disaster, flood, fire, etc., while a homeowners insurance replacement cost policy will do just that. Basically, an actual cash value policy is based on fair market value (FMV,) which means the amount that a prospective buyer would pay for your home after depreciation. Another significant difference between the two types of basic homeowner’s insurance coverage is the price that you will pay for your policy, but it might be worth it for you to take out a replacement cost policy instead.

Now, let us break coverage down into separate concepts. A replacement cost policy includes a detailed explanation of what this term means as defined by the insurer that is issuing your homeowners insurance. In general terms, the fine print for this coverage is related to cost limits in the eventuality of having to replace the damage to your home, whether it be a broken roof, lead pipe replacement, or rebuilding foundational damage. The important factor is to do it within the terms of similar property purpose, cost, quality, and materials used for the insured home without doing any depreciation deduction in the total replacement value. Terms of the policy will apply in all events, except when the insurance limit does not match the replacement cost, or the cost involved to replace or repair partial damages to a property.

However, it is necessary to discuss with your insurer what terms replacement will take place because while this type of insurance covers a whole replacement of your home and items inside it, it is obvious that some of them are subject to depreciation no matter if the policy will not take this fact into account. An example, all of your household appliances and technology gadgets depreciate as new models surface every moment. Therefore, your policy will return the whole value of the property and items insured without depreciating anything, but original brands and models of appliances insured may not be available at a later time or the replacement price can be higher. Keep this in mind at the moment when shopping for homeowners insurance replacement costs. You could get any insurance company like mercury insurance agency to define these replacement terms in writing.

Actual cash value, on the other hand, will depreciate property and items insured, as it would if you were to sell your property and personal assets. Court regulations may apply to set up the reimbursed amount that a homeowner insurance actual cash value policy will pay, but it is generally based on the terms of FMV and what is subject to depreciation. Summarizing, for this policy you will get in return less money than the money you would receive for a replacement cost policy.

Nonetheless, the advantage of actual cash value coverage is that the premium you pay for it is significantly inferior to the amount you have to pay for a replacement cost policy. Another advantage is that you do not need to update coverage limits regularly at all in case of rebuilding or remodeling of your home, as opposite to replacement cost insurance.

Author Bio: Charles Henry works for RentersInsurance.net a website that helps find renters insurance in Florida for people.