Which is Better - Actual Cash Value or Replacement Cost?

Actual Cash Value

Actual cash value is an amount equivalent to the replacement cost (see below) of the property or items at the time of loss or damage, less depreciation.

Replacement Cost

Replacement cost is an amount equivalent to the value of rebuilding your home using the same or similar materials, or replacing your possessions, without adjusting for depreciation.

Therefore a replacement cost policy is better because there is no deduction for depreciation, although the premium is likely to be higher because the insurance company is exposed to a greater potential payout in the event of a claim.

Many insurance policies provide replacement cost coverage for your home and actual cash value coverage for your contents (personal belongings), although you may be able to upgrade the policy to provide replacement protection for your contents as well.

Disclaimer: This article is provided for informational purposes only and should not be considered a substitute for professional advice. Please read your policy carefully and talk with your insurance agent to determine your actual coverage, which may differ from that described above.

September 3, 2010