Actual Cash Value Home Insurance
Home insurance claims may be paid in one of two ways, actual cash value or full replacement cost. Of the two, actual cash value has the lowest premiums, but full replacement cost provides a more accurate settlement. To give you an idea of why actual cash value insurance costs less, it might help to explain what this type of insurance settlement means and why it is set up the way it is.
Actual cash value looks at the original cash value of the home or other piece of property, examines the condition it is in and then depreciates the value according to the age of the item. The cost of any piece of property will always be lower than the amount you originally paid, and will usually fall far short of the cost to replace the item at current market rates.
Because the insurance company is not going to be paying out the amount that the item is insured for, they are able to reduce the premiums. People who are trying to fit home insurance into a stringent budget might want to consider actual cash coverage insurance, but they should keep in mind that the savings may be appealing today but the payout is likely to be very disappointing if a claim has to be filed.
The term "actual cash value" can be misleading, and a lot of people think that this type of payout means they will get the actual receipt amount they paid for the item, but that is the original cash value, not the actual vale by current standards. Do not be fooled by insurance agents who want to sell you actual cash value insurance under the guise of it being a complete coverage option. Actual cash value is very limited in what it will pay to replace, and in most cases you will end up spending a great deal out-of-pocket regardless of how much insurance you purchased.