Deciding between Replacement Cost and ACV

When choosing an insurance policy, it’s essential to understand the difference between replacement cost and actual cash value coverage.

If you ever need to file a claim, it will make a significant difference in your out-of-pocket expenses when you replace your damaged possessions.

The options

With a replacement cost policy, you’ll receive what it will cost to buy the equivalent item today. But with actual cash value coverage, you’ll receive the replacement cost less the decrease in value as the item ages (depreciation).

For example: Your dining set is destroyed in a fire. If you have replacement cost coverage, you will receive what it would cost to go to the furniture store today and buy a dining room set that is comparable in quality to the original. With actual cash value coverage, the insurer will consider the wear and tear of the dining room set and only pay you the depreciated amount. Because it was several years old, depreciation is taken into account. Although it may cost you more to purchase now than what it cost you originally, you’ll receive only the amount the old set was worth if you had sold it on the open market before it was destroyed.

The amount of depreciation is established by the insurance company based on a number of factors including what the item is, its original cost and its age, as well as the wear and tear experienced over the years as assessed by the insurer’s appraiser.

The cost benefit

While replacement cost policies on average cost 10%-15% more, in most cases they will be well worth the difference. The principle behind replacement cost is to allow you to avoid the costs of depreciation. Often replacement cost policies will offer higher limits for coverage. And if all of your belongings need to be replaced, this difference in reimbursement will quickly add up.