Replacement vs. ACV Coverage
One of the most difficult decisions people face in the home insurance buying process is which form of coverage they should use, replacement or actual cash value. Don't wait till the last minute to choose, use this simple overview to help you decide which type of coverage suits you best:
Replacement Coverage
Replacement coverage is generally considered the better option, but only if you can afford the higher cost. With replacement coverage, you are paid to replace any lost or damaged property with new items of the same value. For instance, if your television was stolen, your insurance company would reimburse you the full cost of replacing it with a new television of the same value. The fact that your television may already have significant wear and tear isn't taken into consideration by the insurance provider.
Actual Cash Value Coverage
While there has been some debate over what actual cash value really means, it's usually defined as the cost of replacing stolen or damaged property, minus depreciation. That means the insurance company would take all of the wear and tear on your television into consideration when reimbursing you. Even if your television is only a year or two old, the amount of your reimbursement would most likely be smaller than with replacement coverage. Some companies may also compare actual cash value to fair market value, or how much money you would be able to sell an item for before it was damaged or stolen.
Which is Right for You?
Of course, the million dollar question here is which type of coverage is best for you? In the end, it all comes down to your unique situation. Replacement coverage is typically more expensive than actual cash value, but the difference could pay off if you ever have to make a large claim. If you can afford replacement coverage, it definitely wouldn't hurt to have it. For most people looking for low rate home insurance, actual cash value coverage is sufficient enough, especially when it may never even be put to use. Remember, the main difference between replacement and actual cash value coverage is the depreciation factor. Meaning, if you have mostly new items, depreciation won't hurt the value of your property too much and replacement coverage might not be necessary.
