What Is Replacement Cost Coverage and How Does It Work?

What is Replacement Cost Coverage?

Think about the value of your TV, computer, vacuum cleaner, games, furniture or any other item you have in your home. If you had to buy the same items today, would they cost more, the same or less?

Replacement Cost Value is the amount it would cost to repair or replace an item with one of like kind and quality as the original – in today’s market without deduction for depreciation.

It’s important to know that the Replacement Cost Value is different than the Actual Cash Value of an item. Here’s the difference…

Replacement Cost Value vs. Actual Cash Value

You own a five-year-old TV and you paid $500 for it. The expected lifespan of a TV is 10 years. Each year, the value of the TV decreases by some amount – let’s say $50. Because the TV is five years old, its value is now $250.

      $500 — Original purchase price
–    $250 — Depreciation (5 years x $50/year)

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=   $250 — Actual Cash Value

In this example, if the TV is stolen and your home insurance policy provides Actual Cash Value Coverage, you would be reimbursed $250. If you had Replacement Cost Insurance for your personal possessions, then you’d be reimbursed whatever it would cost to purchase a similar TV.

Of course, if an item is more affordable today than when you originally purchased it, Replacement Cost Coverage doesn’t pay the excess. For example, you may not be able to buy the exact same kind of TV you bought five years ago. But, you could buy a similar model with all the same features for $400. With Replacement Cost Coverage, you would be reimbursed $400 to purchase a new TV.

Replacement Cost Coverage usually reimburses you for the full cost of the repair or the full cost of replacing the items you lose (rather than simply reimbursing you for the value of the item at the time it was lost).

In most states, Replacement Cost Coverage for personal possessions is automatically provided with our standard policies. In others, Actual Cash Value is standard and you may elect to purchase Replacement Cost Insurance.

To learn more about your options, give us a call. We’re here to help!

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