When you are selecting your homeowner’s insurance, there are several coverage options you will likely be choosing from The most common payment calculation methods are actual cash value and replacement cost. What exactly is the difference between them, and which should you opt for?
Replacement Cost
Replacement cost is essentially what it sounds like. If something is damaged or stolen from your home, your insurance company will provide the funding for a comparable new version. Pricing items from within the home is generally straightforward because comparable items can typically easily be found online. It gets a little more involved if your home itself is damaged. When this happens, material and labor costs will both have to be accounted for to fully restore your home back to its original undamaged condition.
Actual Cash Value
Rather than providing funding for a brand-new replacement, an actual cash value policy will only allow you to collect the current cash value of the item. Over time, the value of most items starts to depreciate. When replacing damaged or stolen items, insurance companies will attempt to calculate this depreciation and reimburse you accordingly. When it comes to home damage, the age of the damaged areas of your home will also be taken into account. As such, homeowners with this policy often need to provide additional funding to complete repairs.
Which Should You Choose?
There’s not a cut and dry best choice when deciding between replacement cost and actual cash value insurance. Replacement cost insurance is a great option for those who don’t have an abundance of emergency cash in their savings. That way, in the event that disaster does strike, they’ll be covered fully. The premium will likely be more expensive than an actual cash policy, but the expense is clearly justified here.
Actual cash value insurance is a viable option for those who have a solid foundation of savings set aside. In this situation, you are simply opting for the cheaper premium in hopes that disaster doesn’t strike and damage your home. But, if you do need to submit a claim, you’ll have the funds to cover any additional repairs that your insurance policy doesn’t quite cover.
Choose Insurance Coverage that Works for You at Freedom Insurance
We offer comprehensive, customized coverage from numerous major insurance carriers and make it easier than ever to find affordable policies that are exactly what you need. We have been serving clients throughout the greater Howard County and Carroll County areas since 1979, and we look forward to helping you and your family thrive. Get in touch today by calling (410) 795-2000 or requesting a free quote.
