When looking at insurance policies for your home, you have a ton of different options and amendments to choose from. One of the most neglected details but the most important should you ever file a claim is the difference between choosing the actual cash value or full replacement cost.
Should the need arise to file a claim for your home, your insurance company will use one of these two methods to decide how much to pay you. And your choice when it came to checking which box can make a huge difference. Here is what you need to know about each option when insuring your home.
What Is Actual Cash Value
The actual cash value is a method valuing insured property in which depreciation is subtracted from the actual replacement cost. This depreciation is usually calculated by establishing a useful life of an item and determining what percentage of that useful life remains. The useful life of most household items is standardized across the insurance industry.
For example, say you owned a 50” plasma television that you purchased five years ago for $1,000. Let’s say you could buy the same size and quality television today for $750. The standard useful life for televisions is 10 years. So, your Actual Cash Value for the television would be $375 ($750 times 50%).
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What Is Full Replacement Cost
On the other hand, you can opt to have the full replacement value when insuring your home. This refers to the amount it would cost to replace an asset at the present time, according to it’s worth. This is different from the actual cash value, which is more like current market value.
With this option, a common stipulation is that the actual asset must be repaired or replaced before the cost can be paid.
Using the above example, the insured would receive the $750, which is the current day value of the same television.
Which Insurance Policy Is Better?
If you’re deciding which is better, it is important to note that insuring for the full replacement cost usually costs more on your annual insurance premium. As such, you should weigh the costs of a higher premium, to possibly paying more if you should need to file a claim. I am a big fan of purchasing insurance that provides full replacement cost for your possessions should you need to file a claim.
What about you? Have you ever been burned by not having full replacement cost on your possessions?