When you’re selecting homeowners insurance, one of the decisions you have to make is whether to choose actual cash value or replacement cost value in the event that your belongings are damaged, destroyed, or stolen. These two terms may sound interchangeable, but in reality the differences have a big impact on how much you receive after a claim.
Actual cash value looks at the value of the property, and then adjusts the cost for depreciation. The depreciation adjustment looks at the age of the property to calculate loss due to wear and tear. The value produced is the cost of the item minus what the insurance company calculates for the deprecation.
Replacement cost value does not factor in depreciation. Instead, it simply looks at the cost it would take to replace your property with comparable, new items. To get claim money from replacement cost value policies, you need to replace or repair the item to provide the insurance company with the actual cost of replacement.
Replacement cost value provides you with more thorough coverage on your property, but these policies are more expensive than actual cash value policies. Some insurance companies also offer agreed upon value as a third option. The insurance company creates a list of standard replacement costs for various item types, and that’s what you end up receiving if you need to make a claim.
The last thing that affects how much you receive from the insurance company for a property claim is co-insurance. If you do not report the full value of your insured property, co-insurance levies a penalty against the amount that you receive for the claim. The actual penalty amount varies from company to company.