Understanding Cash Value vs Replacement Cost
When you are getting ready to make a claim on your Homeowner’s policy due to damage or loss of property, will your insurance company reimburse you for actual cash value of the property or will you be reimbursed for the exact value of replacing your property? Aren’t they the same? The answer to that is no…
Many homeowners, because they don’t understand the difference between the two, are surprised when they are reimbursed for a claim, because they thought they were getting one amount, but they get another.
So what is the difference?
In general, both are actually based on what it would cost today to replace your lost or damaged property with new property. But specifically:
Cash value is exactly what it says…you are reimbursed for the cost of the item or property that needs to be replaced, with depreciation taken into consideration to determine the amount you will be compensated for the loss. This could leave you in a bit of a tight place, because in order to replace what was lost, you most likely will need to come up with out of-pocket-money to cover the difference between what it costs to replace it and what its current value is at the time of the loss.
Replacement cost will compensate you with the exact amount it will cost you to replace what you have lost with a new equal item…it doesn’t consider depreciation, and there should be no out-of-pocket costs. Your home, the building you live in, should be covered with this type of coverage.
Most homeowner policies will cover the content of the home with a default of cash value, but if you’re interested, you should ask your insurance agent if you can also cover the items inside the home with replacement coverage.
Unfortunately, if you have items that may have appreciated in value, such as jewelry, collectibles or antiques, they will not be covered by replacement cost. So if you have property such as this and you would like them covered for their value, you should ask your agent to explain about a policy rider.
Is one coverage better than the other?
Some people are trying to keep premiums low, so they opt for cash value, which costs less. While other homeowners may choose replacement cost, so they are assured there will be no out-of-pocket expenses when they need to make a claim. The final decision needs to be based on your lifestyle and your priorities. But if you’re not sure what is the best choice for you…
Give us a call at Whitcomb Insurance we would be happy to sit down with you and help you decide which options are best for you, and answer any questions you might have. You can count on us to be totally honest and up front with you!
Contact us or give us a call at 425-391-8731.