You pay homeowner’s insurance, and although you never want to have to use it, there may be some unfortunate circumstances that may require you to file a claim. Of course, it’s important to crunch the numbers to make sure that it makes financial sense to start a claim, considering the fact that there’s a deductible to pay and an increase in premiums to deal with.
But if the damage to your home or its contents is far more than what these costs add up to be, it can be well worth it to start an insurance claim and put your policy to work for you.
But when you file a claim, one important thing you might want to verify is how you will be reimbursed for the damages suffered. More specifically, will your insurance provider reimburse you for the replacement cost of the items that have been damaged or the actual cash value? What’s the difference between the two?
Actual Cash Value
If your insurance provider offers an Actual Cash Value policy, that means you’d be paid out based on the cost of purchasing another model in the same condition and the same age as the item that was damaged. In this case, depreciation is calculated into your payment.
For example, if the item in question is a 15-year-old stereo system, the payment of your insurance claim will be based on the cost of purchasing another 15-year-old stereo system in the same condition.
With this arrangement, you would be paid out cash to be compensated for the loss of the item. However, it does not allow you to replace that item. In this case, you may have a hard time finding a similar item brand new.
Generally speaking, payouts based on actual cash value and depreciation will leave you with a loss in comparison to replacement cost policies. That said, insurance providers who offer actual cash value policies usually charge a lower premium.
The replacement cost refers to the cost associated with buying the same type and quality item brand new with no deduction made for depreciation. You’ll receive a payment amount that is enough to cover the cost of replacing the item damaged based on today’s values.
This is typically preferred over actual cash value because you’ll be able to recoup funds needed to buy a brand new model.
In terms of your actual home, the replacement cost would refer to the cost to replace the actual structure of your home on the same lot with similar materials. The land itself is not included, just the actual structure. That means if you were to lose your home as a result of a natural disaster, an insurance claim based on replacement cost would cover the cost of the materials and labor needed to rebuild the home.
An important aspect of replacement cost that you should understand is that the item must be replaced in order to receive payment. If not, you might be stuck with reimbursement based on actual cash value.
Your Claim Settlement is Based on Actual Cash Value Vs Replacement Cost
Claims settlement is typically based on whether or not your insurance provider compensates you based on actual cash value or replacement cost. You will need to go over the fine print in your insurance policy documents in order to find out which way you’ll be compensated.
How and When Will You Get Reimbursed After Filing a Claim?
Every homeowner who experiences damage or loss of their home or contents will obviously want to know how much their insurance company will compensate them after filing a claim. As far as the amount of money you will be paid is concerned, the answer will depend on whether or not your provider bases the claim on actual cash value or replacement cost.
In addition, your compensation also depends heavily on how detailed your list is of all items that have been damaged or lost, including descriptions and prices paid upon purchase. If you have photos and receipts, your payment calculation will be even more accurate. Providing as many details of the value of your contents as possible means you won’t have to rely on your insurance provider’s estimates.
The Bottom Line
At the end of the day, the main difference between actual cash value and replacement cost with homeowner’s insurance claims is the deduction for depreciation. You should review your policy documents carefully in order to determine what type of compensation you can expect if you ever have to file a claim in the future.