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What is best: replacement cost or actual cash value home insurance coverage?

Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella...

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Reviewed byDaniel Walker
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UPDATED: Mar 19, 2020

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Homeowners Insurance PolicyMost industry experts agree that replacement cost coverage is better than actual cash value home coverage insurance.

To understand why this is the case you need to learn the definitions of both terms, know your options for coverage, know what the financial costs for both are and understand the limitations to both types of home insurance coverage.

Review those facts prior to taking out a home insurance policy. Also, make sure to enter your zip in above for free home insurance rates!

Definition of Replacement Cost Coverage and Actual Cash Value

In the home insurance industry replacement cost and actual cash value refer to the amount of money your provider will pay out if your home or its contents are damaged or destroyed. The definition of actual cash value is replacement value minus depreciation.

Another way to look at this is what you could buy or sell the item for before it was ruined. For example, you may have paid $1,000 for your home computer five years ago; but with depreciation you could buy a five year old computer for only $300. With actual cash value that is all you would receive – the $300.

Replacement cost coverage is defined at the cost of replacing the item at this point in time. So, to buy a computer comparable to the one you purchased five years ago will like cost you $1,000 or more with inflation.

With a replacement cost coverage policy your insurer must provide the funds so that you can purchase a new computer that is comparable to the one you had before. Clearly, given the option, the replacement cost value it the better choice. However, there is more to consider.

Standard and Extended Coverage Option

You need to be aware that actual cash value is the typical standard coverage offered by most home insurance policies. Most companies also offer replacement value as an option, but you need to request and pay for it specifically. Also, you will need to decide what type of replacement value coverage you are willing to pay for.
In addition to replacement value, many home insurance providers offer extended replacement coverage and guaranteed replacement coverage.

Extended replacement coverage usually allows for the cost of replacing your home structure or its contents to exceed the policy limit to a certain point; usually to 120% or so above that limit. Guaranteed replacement value does not place any limit on the cost it takes to replace the item in question. Of course, you will pay more for these more extensive coverage options.

Real Cost of Replacement Value Coverage

In terms of what upping your coverage from actual cost value to replacement cost value will have on your bank account, you should expect to spend an added 10% on your annual premium. If you are a renter adding replacement value coverage to your renter’s insurance then you can expect the premium to jump by 20%. Those are the financial figures. Here are some other facts to consider in terms of costs.

Actual cost value policies have lower premiums and can save you money on a monthly basis. However, if tragedy occurs, you may pay a higher cost at that time.

As your home and possessions age, the need for replacement value gets greater. That is because the gap between the actual cost and replacement cost of your things widens. Homes need more repairs, roofs weaken, and fixtures experience wear and tear. That being said, there are some limitations on what a replacement policy will cover.

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Limitations on Replacement Value Coverage

Each company will have different limits placed on your replacement coverage because they don’t want to be liable for certain things. For example, an insurance provider might place a financial limit on roof replacement, or on the age of roofs they will replace. This ensures that they are not paying for normal wear and tear and neglect by homeowners.

You also need to be aware that home insurance, and therefore replacement value, does not cover the land your home is on. This coverage is meant to rebuild and repair structures and replace personal property only. (Liability is a separate portion to pay for damages to others on your property and not related to replacement cost or actual cash value.)

Also, you need to make sure what structures are covered and what ones are not. For example, sheds and out buildings are not covered in the basic HO-1 home insurance policy.

So, unless your main goal is to save money on premiums, replacement cost value is a far better deal. Actual cost value is minimum coverage and its only plus side is a lower monthly payment. If your main goal is to provide security for your home and your possessions, or peace of mind for your self, then what is best is replacement cost home insurance coverage. Start comparing quotes now!

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