What Is The Difference Between Replacement Cost Vs. Actual Cash Value?

Replacement Cost is the amount it would take to replace or rebuild your home or repair damages with materials of similar kind and quality, without deducting for depreciation. Depreciation is the decrease in home or property value since the time it was built or purchased because of age or wear and tear. Many insurers require homeowners to insure their homes for at least 80% of the replacement cost. If the homeowner fails to insure for at least that, a penalty is applied to partial losses. For example, if it would cost $50,000 to replace your home and it is insured for $40,000 (80%), and a fire causes $25,000 worth of damage, then your insurance company will pay the full $25,000.

On the other hand, if your $50,000 home is insured for $30,000 and you suffer a $25,000 loss, your company would pay for only part of the loss and you would have to pay for the balance yourself. It may therefore be advisable to insure your home at a minimum of 80% of its replacement cost. Check with your agent or insurance company to see what is required. You may wish to insure at 100% of replacement cost so you will have sufficient coverage in the event of total loss.

Actual Cash Value 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 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 a replacement cost. The premium will be slightly higher for this coverage; however, you may want to consider the option.

Whether your home is insured for replacement value or actual cash value, it is important to keep track of its value. For instance, the addition of a room, improvements, and yearly inflation all increase the replacement cost of your home, while the actual cash value of the home may decrease over time.

Check with your agent or insurance company at least once a year to make sure your policy provides adequate coverage.

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.

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