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Replacement Cost or Actual Cash Value

Replacement cost is the amount it would take to replace or rebuild your home or repair damages with material of similar kind and quality, without deducting for depreciation. (Note: Depreciation is the decrease in home or property value since the time it was built or purchased because of age or wear and tear.)

Actual cost values is the amount it would take to repair or replace damage to your home after depreciation. For example, if your roof has a 20-year warranty and is 17 years old, there would be depreciation for the age and condition of the roof.

Most standard insurance home insurance policies cover the contents of your home (i.e. personal belongings) on an actual cash value basis. Many insurers offer an option for you to insure your belongings at replacement cost. The premium will be slightly higher for this coverage; however, you may want to consider this option.

There are also optional coverage you may want to consider such as guaranteed replacement cost coverage and inflation guard endorsement.

An Example of how Replacement cost coverage and Actual Cash Value coverage would respond at the time of an insurance claim:

Many insurers require you to insure your home for at least 80 percent of the replacement cost.

If it would cost $125,000 to replace your home and it is insured for $100,000 (80 percent of its replacement value) and a fire causes $25,000 worth of damage, then your insurance company will pay the full $25,000.

If however, you home is insured for less than 80 percent of its value the insurance company will only pay part of the loss. Take for example it would cost $125,000 to replace your home and it is insured for $75,000 and you suffer a $25,000 loss the company will only pay 75 percent of your loss. Thus, $25,000 x 3/4 loss = $18,750. You would have to pay the balance of $6,250.

You may wish to insure your home for 100 percent of replacement cost so that you will have sufficient coverage in case you suffer a total loss.

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