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Replacement Cost Coverage Home Insurance

The two ways that an insurance policy can be written for payouts is for actual cash value and replacement cost. Actual cash value pays out a depreciated amount that takes the age and condition of the insured item into account, while full replacement cost will pay to repair or replace the item no matter what condition or age it is.

Replacement cost insurance allows you to replace the damaged item no matter what it costs on the current market. This can be an important factor, because the cost of, say, an appliance will be higher over time, meaning that the actual cost pays for less of the replacement value over time. Replacement cost will replace your stove with an exact or similar model even years after buying the original.

Replacement cost insurance has higher premiums than actual cash value policies. The reason for the higher premiums is to take the rising cost of the item into consideration. And even though you are paying higher premiums, the insurance is still very reasonable when you consider that it would cost you the replacement value out of pocket if you didn't have insurance to cover it. By contrast, replacement cost will replace the item, while actual cash value will always require you to make an out-of-pocket contribution.

Which type of coverage is best for you depends on your financial situation more than anything else. If you can afford to have replacement cost insurance, you will not be surprised by large costs when you file a claim, but if money is being strictly monitored, actual cost insurance is better than no coverage at all.