With home insurance, there are two main valuation types that insurance companies use when calculating quotes for losses you experience. These types are replacement cost and actual cash value (ACV), and there are some major differences with them. Here are the top differences to know.
ACV Values Your Items At Their Depreciated Value
ACV is a common method used for home insurance policies, and it is designed to calculate the value of things you lose by determining their actual values. To do this, an insurance company will consider the effects of depreciation. Depreciation refers to the loss of value of something over time. For example, if you buy a car, it will not always be worth the amount you paid for it. Instead, the minute you leave the dealer's parking lot, it will already be worth less, simply because cars begin depreciating right away. Your house and the things in it work just like this.
An example of this is a couch. If you pay $1,000 for a couch, it will not be worth the full value a day later, simply because you cannot sell it for the full $1,000. The next day it might be worth $800. After a year, it might be worth $500, but after 3 years, it might only be worth $100.
Therefore, if you lose your home and belongings to a fire, the insurance company will determine how much your personal items were worth when the fire happened, and this means they will factor in depreciation.
Replacement Cost Calculates Losses By The Cost To Replace Them
The second type of valuation method is replacement cost, and this option tends to work out better for homeowners. If you have a fire that destroys your things, the insurance company will not factor in the actual worth of your things, including depreciation. Instead, they will determine how much it costs to replace them. With the couch example, they may determine that it will cost $1,400 to replace the couch, and this is the amount you would receive as compensation.
ACV Policies Cost Less
As you can imagine, purchasing a policy that offers replacement cost coverage will cost more money, but it is also worth it, as it will result in protecting you more than a policy with ACV coverage.
If you need homeowners insurance and want the best coverage available, it might be worthwhile paying a little extra to make sure you have replacement cost coverage benefits on your policy. If you would like a quote for coverage, contact a homeowner's insurance agency today.
