Save Money With Lower Home Insurance Rates!

Save Money With Lower

Home Insurance Rates!

What is the difference between actual cash value and replacement value?

Actual cash value, also known as market value, and replacement value are policy elements of liability insurance, a critical part of any home insurance plan. As their names suggest, they refer to the monetary and replaceable value of items in your home. They each serve an important protection purpose for home owners. So what's the difference? Depreciation. Depreciation is the reduction in home or property value since the time it was built or purchased because of age or damage. To better understand depreciation, it might be helpful to get a clearer perspective on actual cash and replacement values.

Actual cash value coverage provides home owners with the true monetary worth of their home or items within their home before any loss occurred. This often includes damage or destruction caused by storms, fire or theft. Actual cash value can be confusing and a source of frustration for home insurance policyholders because it does not mean that the original purchase amount will be reimbursed. For example, if the piano in your home was damaged, it would be assessed for its current cash value after depreciation. Basically, you may have paid $7,000 for it but it may now only be worth $2,500.

On the other hand, replacement coverage is a bit more straightforward to understand. If your home or belongings were damaged, this part of your home insurance plan would replace these items with similar ones. Depreciation plays no role in replacement coverage. To borrow from the piano example in the actual cash value section, if your baby grand was dented, smashed, or irrevocably broken, replacement coverage would require that your home insurer provide you with a new one of similar quality.