Article Details Article DetailsReplacement Cost is the amount it would cost to replace the like, kind, and quality of your home with today's cost of materials. There is not a dollar amount subtracted for depreciation- the decrease in value to property over time due to wear and tear. A replacement cost policy usually yields a higher premium but provides much more coverage than an Actual Cash Value Policy.
Actual Cash Value is the replacement cost of property less depreciation. At the time of a loss with an actual cash value policy, the insurance company calculates the amount it would take to replace all the damaged property and subtracts the decrease in value over time. Because this eliminates thousands upon thousands of dollars for the insurance company to pay out over time, the actual cash value policy usually yields a much lower premium than replacement cost.
Example:
Michael and Julian are newly-wed, first-time home buyers. They purchase a $250,000 home (market value). After speaking with their insurance agent about the home being built in 1987, modern structure and high quality details of their home, determine the replacement cost of their home is $300,000. Michael and Julian go on vacation for a week in the Dominican Republic. Upon their return, they open the door to step into their beautiful modern home and are unpleasantly surprised by being welcomed with at least three inches of water on the entire bottom floor. After stopping the gushing water under the kitchen sink, they call their insurance agent to file a homeowners insurance claim. The insurance adjuster comes out and estimates it will cost $76,000 to replace the damages to their home and personal property.
Replacement Cost Claim Scenario:
The agent subtracts their $3,000 deductible (1%) from the total and hands them a check for $73,000 to have repairs done and replace the irreparable. Michael and Julian take their check for $73,000 and make the necessary repairs and replacements.
Actual Cash Value Claim Scenario:
The insurance adjuster comes out and estimates it will cost $76,000 to replace the damages to their home and personal property and hands them an itemized list of damages along with the corresponding depreciation. Wood Floors: Replacement Cost $15K — 10 years depreciation $7K=Payment Amount $8K. Ikea Furniture: Replacement Cost $10K — 5 years depreciation $5K=Payment Amount $5K. Musical Equipment: Replacement Cost $12K — 5 years depreciation $6K=Payment Amount $6K, etc.... Total depreciation totals $36K. The agent subtracts their $1000 deductible and the $36K from depreciation and hands them a check for $39,000. Michael and Julian take their check for $39,000 make all the repairs necessary to live normally and come out of pocket the remaining $37 to replace the rest of their personal belongings damaged.
