December 27, 2010
Actual cash value policy vs. replacement-cost policy
(Photo: nexthttp/Flickr)
When it comes to homeowner’s insurance, there is an important distinction between an actual cash value policy and a replacement-cost policy.
The actual cash value policy will pay you for the value of the item at the time it needs to be replaced.
In other words, if you bought a entertainment center for $1,000 a few years ago, the cash value policy will take into account depreciation on that furniture. If the entertainment center depreciated in value by 20 percent, the cash value policy would only pay you $800.
On the other hand, a replacement-cost policy will pay you enough to replace the entertainment center with the same one.
You can see why it’s an important lesson because you don’t want to be surprised when you get less than the amount of money needed to buy new stuff in the event you need to replace something.