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Did you just buy your first home? Then it’s a good time to learn a little more about your homeowners insurance! An important concept to understand in terms of your homeowners insurance is “actual cash value” versus “replacement cost” coverage. There is a key distinction between the two, and understanding the difference between them will help you make the best choices when it comes to getting the right homeowners insurance policy for you.

Exactly What Does "Replacement Cost" Mean?

Replacement cost is the amount it would cost to replace your destroyed, damaged or stolen items with the exact same, or very similar, items after a loss has occurred.

For example, if your camera was to be stolen, a replacement cost policy would reimburse you for the cost of replacing the camera with a new one of the same kind, or a very similar type. Even though you may have used the camera for years and incurred considerable wear and tear, that will not affect the replacement cost under this type of policy. (Pretty cool, huh?)

And What is "Actual Cash Value"?

Actual cash value is interpreted as the “fair market value” of an item. Put simply, this  means that depreciation will be factored into how much you receive for the claim. Depreciation is commonly calculated by the using the item’s value as a portion of its life expectancy.

For example, if a roof is predicted to last 30 years but is destroyed 15 years after installation, the actual cost value would equal half of the original cost of the roof.

So, What's the Difference?

The only difference between replacement cost and actual cash value is whether or not a deduction will be taken for depreciation. As previously mentioned, an actual cash value policy does take a deduction for depreciation while a replacement cost policy does not. If you are unsure which policy is best for you, a DSI agent can help you choose the coverage that fits your needs. Give us a call today at (888) 337-9322.


Photo: Shutterstock

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