You asked: "What is the difference between replacement cost and actual cash value?"

By: Larry Spears

Today I want to answer a question we get all the time. What's the difference between actual cash value and replacement cost? Yesterday we talked about why your policy can increase even if you haven't had any claims, especially how home coverage goes up over time because rebuild costs go up. Now I want to focus on something even more important than the coverage limit itself, how your home and your belongings are valued after a claim.

There are two primary insurance policies to settle claims. Replacement cost or actual cash value. Replacement cost means the insurance company pays what it costs to replace the damaged property with new materials of like kind, and quality without subtracting for age or wear and tear. Actual cash value pays what your property is worth today after depreciation.

Let me give you a little example. If your 15-year-old roof is damaged in a storm and your policy is written on an actual cash value basis, the company may subtract 15 years of wear and tear before issuing the payment. So instead of receiving the full cost of a new roof, you could receive a significantly reduced amount, sometimes thousands less, and you would be responsible for paying that difference. The same applies to your personal belongings. If you lose a couch, a TV, or a bedroom set under an actual cash value policy, you're not being paid what it costs to replace those items new. You're being paid what those items were worth at the time of the loss. For some homeowners, an actual cash value policy is selected to lower the premium, but it's not for everyone. After a major loss, most people don't want a depreciated payout. They want their home rebuilt and their belongings replaced.

Replacement cost to coverage is designed to restore you to where you were before the loss, not leave you in a financial gap. Replacement cost policies typically cost more because the insurance company is taking on more of the risk, but here's the question we always ask. If something major happens, do you want to rebuild? Or do you want a check based on what your property was worth yesterday? Those are two very different outcomes.

Our role isn't just to quote the lowest premium, it's to make sure your policy performs the way that you expect it to when it matters most. If you're not sure which valuation method your current policy uses, that's a conversation worth having. Give us a call anytime 734-282-8700.

Thank you and have a wonderful day.