Homeowners insurance policies offer both replacement cost coverage and actual cash value coverage. Both coverages are made to replace your damaged, stolen, or destroyed property, but, one option is better than the other.
Actual cash value coverage may sound more appealing, but it actually isn’t. If you have ACV coverage and something happens to your personal items, the money you receive from your insurance company will equal what you would pay for a similar item at today’s cost - minus depreciation.
Depreciation - a decrease in value due to wear and tear or age.
Therefore, you are likely to receive a smaller amount of money from your insurance company if an item is a few year old because the value of that item has gone down.
If you have replacement cost coverage and something happens to your belongings, your insurance company will pay you what you would pay for the item at today’s cost - with no depreciation.
Therefore, if your $1,000 laptop is destroyed in a flood and you have replacement cost coverage, you will receive $1,000 from your insurance company, regardless if the laptop is 4 years old. Whereas if you had ACV coverage, the value of your 4 year old laptop will have depreciated to only $400, leaving you with a $600 loss.
Be sure to ask your insurance agent which coverage you have on your home, car, personal items, and anything else of value.
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