When you purchase home insurance, the agent will ask you whether you want actual cash value or replacement cost for your possessions. Both types of coverage pay for items that are lost, damaged or stolen. The amount of money you'll actually receive varies based on which type of coverage you choose, though, so understand the difference as you make the most protective and economical choice for you.
Actual Cash Value Coverage
With ACV, you receive payment for what the item is worth if it were sold today. You will not receive a check for the amount you paid for the item, and you may not receive enough money to buy a new one of comparable style, size or quality.
To determine ACV, the insurance company first calculates the object's depreciation. This value is based on the item's age and its wear and tear.
Select ACV when you want to pay less for your home insurance premiums. Remember, though, that you'll also receive a lower reimbursement check after you file a claim.
Replacement Cost Coverage
If you want to buy exact replicas or comparable items, purchase replacement cost coverage. It reimburses you for the amount of money you would pay to replace your items today, even if those items depreciated significantly from wear and tear.
The total payment you receive will not exceed your policy's total value, so don't expect to replace your $1 million home if your policy only provides $500,000 worth of coverage.
While you pay more for replacement cost coverage, you have peace of mind knowing that you can replace your electronics, jewelry and other items if you have to.
The type of insurance coverage you choose depends on your budget and preferences. Your insurance agent can calculate your home insurance premium for both types of coverage before you choose the one that works best for you.