Which's Better: Actual Cash Value or Replacement Value?

Actual cash value and replacement value are two important concepts that homeowners need to understand when it comes to their homeowners replacement insurance. These are common methods that homeowners insurance companies use to compute the amount of money you will receive toward your home replacement value or a covered loss of personal property.

Actual Cash Value

If you're filing an insurance claim, this is the amount of money you would receive after your insurance company subtracts depreciation from the value of your home or personal property. Usually, the amount you will be reimbursed is far less than what it would cost to repair, replace or restore the damaged or lost property.

Generally, your insurance carrier calculates the depreciated value of the property based on objective factors, such as type and age. They may also incorporate subjective aspects, including:

• Adjuster's visual observation of the property
• Photographs
• Videotape.

For example, let's say your roof is torn off by a tornado and you have 15 years left on a 20-year warranty. If your homeowners insurance reimburses you according to actual cash value, you'll be reimbursed for the remaining 15 years on the warranty.

Replacement Value

This term refers to the actual amount it will cost to repair, replace or rebuild your home or personal property. The idea is to use similar materials of equal quality, and not deduct depreciation value.

Be aware that even the replacement cost option may have limits. Read your policy to ascertain the exact definitions and details regarding replacement cost. There are various replacement value options you'll need to consider.

One option is purchasing a replacement cost policy that will pay a specific percentage above the dollar limits of your policy. However, the best choice is a guaranteed replacement cost policy, which will ensure that you'll have the coverage to completely rebuild your home. Imagine that your home is completely wiped out due to a catastrophe of some kind. A regular replacement policy will cover costs up to the total amount of your policy. A guaranteed replacement cost policy, however, will cover all associated costs.

Changes in the local building codes may require you to make certain upgrades to the original structure, which may not be covered. A guaranteed replacement policy will also provide you the necessary coverage for your updated home replacement value, adhering to these new requirements. This policy will afford you peace of mind, as you'll be sure that that your homeowners replacement insurance will cover you, regardless of the circumstances.