Your homeowners insurance policy will offer you financial protection in the event of an unexpected disaster. However, the type of coverage contained in your policy ultimately determines how you’ll be reimbursed after submitting a claim. There are two main valuation methods when it comes to homeowners insurance – replacement cost coverage and actual cash value (ACV) coverage. By understanding the difference between these valuation methods, you will be able to make informed decisions regarding your homeowners insurance so that you are guaranteed to secure the right coverage that meets your needs.
Although both coverages offer financial protection, the amount your policy will pay differs between these two valuation methods. Here are the key differences:
This policy will offer compensation for the cost of replacing your stolen, damaged, or destroyed property with a brand-new version (as long as it is similar in kind and quality to the original). For example, if your couch is destroyed in a house fire, replacement cost coverage would reimburse you for the cost of purchasing a comparable new couch. In other words, replacement cost coverage will replace your property without any deduction for depreciation.
This form of insurance coverage can be especially beneficial in protecting against major losses, such as significant damage to the physical structure of your home or to expensive items within your home. However, replacement cost coverage comes at a price as it typically requires you to pay a higher premium. In addition, remember that you will only be compensated up to your policy limit amount. If you experience a covered loss that exceeds your policy limit, you may wind up having to pay the remaining monies owed. If you are concerned about the risk of a covered loss totaling more than your policy limit, be sure to consult your trusted broker to discuss additional policy options—such as guaranteed replacement cost coverage or extended replacement cost coverage—which can provide you with further financial protection.
On the other hand, this type of policy offers compensation for the depreciated value of your property. This value is determined by the age, condition, and expected remaining useful life of your property. Under this coverage, you would not be reimbursed for the full cost of replacing your destroyed couch via the above example. Rather, you would be compensated for the current market value of the couch, based on its condition before the fire. Even if you initially purchased the couch several years ago for $2,000, you might only be reimbursed $1,000 for your loss due to depreciation from wear and tear.
Although this form of coverage typically offers reduced compensation for a covered claim, you will save money on your policy premium. Actual cash value coverage is usually more suitable for individuals that live in low-risk areas (e.g. locations where incidents such as heavy winds, fires, or theft are less common) or own fewer expensive items.
There are pros and cons to both replacement cost coverage and actual cash value coverage. The following steps will guide you to select the best coverage that meets your specific homeowners insurance policy needs:
There are several factors to consider when determining which type of coverage is right for you. But you do not have to navigate this decision alone. Camargo Insurance Agents are here to walk you through acquiring your homeowners insurance policy. We provide expert guidance regarding which coverage option is best for you, your belongings, and your wallet. For further coverage guidance, contact us today.