When you purchase a homeowners insurance policy, you must consider which coverage options would best protect your assets. However, many homeowners do not know whether or not they should opt for replacement cost coverage or actual cash value reimbursement. This is an extremely important decision regarding your coverage, emphasizing the importance of understanding these reimbursement methods entirely.
The standard policies come with actual cash value coverage. This means that any losses endured will be replaced to you at their current cash value, which calculates the depreciation of the item. In contrast, replacement cost coverage, which is often more favorable in terms of coverage, provides you with the actual value of the item. Many insurers require receipts and appraisals for replacement cost coverage, since you receive a greater value for your dollar. Whenever a loss occurs, you receive full compensation for the item at its current or appraised value.
For example, if you have actual cash value coverage and the television that you purchased three years ago at $2,000 becomes damaged, but the depreciated value of the television is approximately $500, you will only receive reimbursement for the depreciated value. In contrast, if you have replacement cost coverage, you would receive the full $2,000.