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Insuring Your Home

When we started thinking about buying a home, I realized that we had a boatload of work to do. I knew that we needed to save up a down payment, talk with a mortgage broker, and most importantly--figure out what we were doing about homeowners insurance. Fortunately, a friend of mine told me about a great insurance broker in our area who handled that kind of thing. We met with her to talk about our options, and before we knew it, we had found a policy that really melded with our budget and lifestyle. This blog is all about insuring your home.



Actual Cash Value And Replacement Cost Home Insurance Coverage: What To Know

As you compare home insurance policies, you might notice that some insurers give you actual cash value coverage while others offer a replacement cost option. Both of these coverage types deal with the payments you will get in an insurance claim; however, they pay out in different ways.

Read on to learn about the differences between these two types of home insurance coverage.

What Is Actual Cash Value Coverage?

Actual cash value coverage applies deprecation costs to your insured property and items. Your policy values items in a claim based on their original value minus deprecation. Depreciation factors include age and average wear and tear.

In practical terms, this means that your insurer will not make a payment that exactly matches the original purchase price or replacement costs of an item. Payments reflect the actual value of the item at the time you make a claim.

For example, say you need to claim on your insurance after a computer is stolen. The computer is a few years old.

If you were to value the computer now, it will be worth less than the original purchase price because depreciation has decreased its dollar value. This is its actual cost, and this is the amount you will receive.

Actual cash value coverage is typically the cheapest option. However, you will have to cover any shortfall if your insurer's payment doesn't meet your replacement costs.

What Is Replacement Cost Value Coverage?

Replacement cost coverage pays out based on costs you would pay to replace an item. It doesn't use depreciation in its pricing mechanism.

Here, you would cost up your computer based on the money you would have to spend to replace it with the same model or a comparable one. Your insurance payment covers your replacement costs even though these might be higher than the costs of your original purchase.

In some cases, your insurer will offer you a modified version of replacement coverage. This usually applies to property policies.

For example, if you live in an older home, then you might not be able to use exactly the same materials to rebuild it if it is damaged. Here, your insurance company will cost your claim based on the costs of the most suitable alternative materials.

Replacement cost coverage is a good option if you don't want to have to pay any replacement costs when you put in a claim. You'll pay more for your coverage, but you will also get more back.

To find out more about these two options and other coverage options for your home and belongings, talk to home insurance providers.