Home Insurance: Actual Cash Value vs Replacement Costs

Within your homeowner's policy, everything is based on replacing something that you have - whether it's the entire structure, whether it's personal property, whether it's windows or fences  -  You have two ways of valuing those things: the actual cash value or the replacement cost. 

Actual Cash Value vs Replacement Costs

An actual cash value will include depreciation. Everything that we buy has a lifespan. The actual cash value takes into account where that item is along its lifespan. So if you buy it for $100, it may only be worth $60, which leaves you with a shortfall. When it comes to replacement costs, that will take into account appreciation. If you have a chair that you pay $200 for but you have to replace it, well, that chair may cost $350 now.  

Under replacement costs, the replacement will be at $350 - whatever it costs to replace what you had, at the same level of quality.

A very good example are TVs that we paid thousands of dollars for 15 years ago are still working, but they're not worth their original value. There's a movement now at some insurance companies for the consumer to pick a premium that they want to pay and the company will provide coverages that match that price but the company only providing actual cash value for their items is one of the things that they may or may not know to look out for. 

You may have $50,000 of personal property, but if each item is going to be at actual cash value then you may find yourself several thousands of dollars short when you go to buy replacements for those items.

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The Claim Differences Between The Two

These little differences can end up being a big difference when a claim is paid and you have to really walk through that. People are paying their premiums, and they expect their life to be as it was before their claim. If it's an actual cash value instead of replacement cost, then it won't be.

Actual cash value versus replacement cost is a big deal in the small print.

So forget actual cash value. If anybody asks you just remember the two words replacement cost.

Are you thinking of buying or selling a home in the Nashville and Middle Tennessee area? Give me a call at (615) 930-0313, schedule a call with me, or send me a message! I love helping people and using my financial and legal background to guide you in finding your dream home!