Actual Cash Value vs. Replacement Cost Renters Insurance

Before you purchase a renters insurance policy, you should know what coverages may be offered and how to choose the best one for you. There are two types of coverages; replacement cost and actual cash value cost. Knowing what these coverages are and how they protect your assets is important in determining what type of coverage you need. So, what is replacement cost coverage and actual cash value coverage?

Replacement Cost Coverage may cover the cost of replacing an item with a brand-new version of itself. For instance, if your closet is damaged by a fire and ruins your favorite shirt and hat, the coverage is the cost of you buying these items or similar ones at the store. Replacement cost is fairly simply because it is just as it sounds, your assets are replaced. If you’re covered and a possession of yours is damaged, then you may be covered for a brand-new one with replacement cost coverage.

Actual Cash Value Coverage typically covers the actual cash value of an item, this coverage is often referred to as Depreciation Coverage. Depreciation is an item’s loss of value over time, which is estimated by insurance adjusters. An item begins losing value as soon as it is taken off the store shelf and is purchased.  Since items go through wear and tear, they lose their value and are typically worth less the older the item is. Certain items like jewelry or antiques may experience appreciation over time, so it is important to make sure these items are covered for their full value. Actual cash value may only cover the depreciated cost of the item damaged in a flood, fire, or other unexpected event.

While deciding between the two coverages may be difficult, take a look at your assets and think about which is best suited for you. With replacement cost coverage you may pay a higher premium but in the event of damage or theft, your insurance pays for replacement in full. With actual cash value, you may save on premiums but will have to make up the difference between the depreciated value and replacement value of the item.