Home Insurance Articles
Reimbursement Plans: Actual Cash Value And Replacement Cost Coverage
2010-01-14
When we insure something, we do so in case it someday gets damaged, lost or stolen. We insure things that are valuable to us, such as homes, cars or boats, because their damage or loss would create financial difficulty. When you purchase homeowner's insurance, a major decision will be how you choose to be compensated for a loss. Insurance carriers reimburse their policyholders for losses by two major methods. One is based upon replacement cost and the other is based upon actual cash value.
The long and short of it is the element of depreciation. Depreciation is the loss of value something undergoes with time. In a replacement cost coverage policy, the insured is reimbursed for the replacement cost of the goods. To illustrate, say your home is hit hard by a hailstorm. The siding and roof have retained a lot of damage and are going to need to be replaced. Under a replacement cost coverage policy, you would be reimbursed the amount of money it would take to replace the siding and roof. Your insurance carrier's adjustor would compare prices on contractor sites indicating how much it would cost to replace these things, ultimately giving you that amount. This is the more desirable of the two types of coverages. In this method, you aren't being penalized for how old the siding is or how long it has been since the roof was replaced. You would receive full reimbursement for the cost of a brand new roof and siding.
Under an actual cash value policy, you would be reimbursed for the value of the property at the time of the claim. That means the depreciation the siding and roof would enter the equation. The result is that you would receive a smaller check from your insurance carrier.
Should you choose a replacement cost or actual cash value policy to protect your goods? It depends on what you are willing to pay in premiums. The fact that replacement cost coverage is more desirable to have is a "no-brainer."However, you should consider if you're willing to pay higher premiums to obtain that superior level of coverage. In making an intelligent decision about which of the two types of coverage to purchase, you should weigh the difference in premiums, the level of "wear and tear"you will inflict upon your goods and the depreciation of such goods in the marketplace. Additionally, you shouldn't overlook another element of control you have over your premiums in terms of selecting a high deductible or low deductible.
You will be able to choose the right reimbursement plan for yourself as long as you consider all the proper things upon purchase of the policy.