One of the most important things for a homeowner to understand is the difference between replacement cost and actual cash value. Your home is likely your most valuable asset, so it’s crucial to know how your insurance company calculates claims in the event of damage or destruction.
What isReplacement Cost?
Replacement cost is exactly what it sounds like—the cost to replace your home and everything in it. This type of coverage is typically recommended because it will reimburse you for the full cost of rebuilding your home, no matter how much it has gone up in value since you originally purchased it.
For example, let’s say your home was built 10 years ago and is currently insured for $250,000. If your home is destroyed by a fire, your insurer would pay the full $250,000 to cover the cost of rebuilding, even if the current market value of your home is $300,000.
What is Actual Cash Value?
Actual cash value (ACV) coverage, on the other hand, only reimburses you for the market value of your home and possessions at the time they’re damaged or destroyed. So using the same example as above, if your home was insured for $250,000 but its market value had increased to $300,000 when it was destroyed by a fire, you would only receive $250,000 from your insurer—even though it would cost more than that to rebuild.
As you can see, there’s a big potential downside to ACV coverage—you could end up being underinsured if your home increases in value over time. That’s why replacement cost coverage is typically recommended for homeowners.
So there you have it—a brief overview of replacement cost vs actual cash value for homeowners. As you can see, replacement cost coverage is usually the better option since it ensures that you’ll be fully compensated if your home is damaged or destroyed. Be sure to talk to your insurance agent to find out which type of coverage is right for you. Thanks for reading!