Even though nearly all policies today include replacement cost coverage it can be important to know the difference between actual cash value and replacement cost. For instance, certain aspects of your policy may be ACV or you may receive ACV payment in the event you choose NOT to replace and damaged item and instead want to take the cash.
What’s the difference?
Let’s say you have a fire in your home, or even a burglary. When you file your claim with your homeowner’s insurance company, your claims representative will have to assign a value to the property that was damaged or stolen.
Actual cost value is the value of your item minus depreciation and is sometimes referred to as the fair market value of an item. If you purchased a brand new television in 2009 it is worth the price you paid. In 2013, that same television is stolen but it is now used and has suffered considerable wear and tear. If your policy is only written to cover actual cost value, you will only receive the depreciated amount for the television – which likely won’t be enough to replace it with a television of similar value.
A policy with a replacement cost rider ensures that the television you purchased in 2009 is replaced with a comparable television, even if it costs more than the depreciated value. Wear and tear, in this case, isn’t taken into consideration.
What you should look for when purchasing a policy
Almost every single homeowners insurance company offering coverage today automatically adds a rider to include replacement cost coverage.
No matter how your policy is written, it is important to remember the company will not necessarily cut you a check for the limit on your policy just because everything is gone. Having proof that you acquired certain high-value items – like televisions, computers, and video game systems – will help to show what you owned when it comes time to make payment. It is a good idea to take a video inventory of your home every 6 months or so, storing it in a separate location, so that you can show what property you have. Pictures and sales receipts can help as well.
Finally, make sure you properly cover collectibles, jewelry, firearms, silverware, and other types of property that are not included in the personal property limit of your homeowners policy. In most cases you need to have these items scheduled onto your policy and you will have to show your insurance professional proof of ownership and/or an appraisal.
Talk to your insurance agent today to make sure your possessions and your bank account are protected in case of loss.