Finding the right home insurance policy can be tricky—understanding it can be even trickier. Have you ever wondered about the difference between actual cash value and replacement cost? Understanding the difference will help you choose a policy that meets your needs. Read on to learn more.

Actual Cash Value

Actual cash value is traditionally defined as the amount of money it takes to replace a damaged or lost item with a new one of similar quality, minus the amount the original item had depreciated.

For example, if your laptop is stolen and your homeowner’s policy covers the actual cash value of the item, your insurer will consider the amount of time you owned the laptop and the wear and tear it had experienced.

If a $1,000 laptop should have lasted about 8 years and you’d had it for 4, you’d likely receive about $500, since you’d already gotten $500 worth of use out of the laptop.

The payout for actual cash value policies is usually lower than that of replacement cost policies, but don’t completely discount this option—the premiums for these policies are usually lower, and you’ll still be fairly compensated for lost items.

Replacement Cost

Replacement cost policies are a little simpler than actual cash value policies. Simply put, they cover the replacement cost of the original property. Replacement cost policies cover replacing the original item with an item that will be used for the same purpose in the same location. The amount paid out should cover the cost of an item of similar quality and similar materials.

If your 4 year old, $1,000 laptop was stolen and you had a replacement cost policy, you’d receive about $1,000 for a new laptop. The payout for this kind of policy is higher—but be warned, the premium will be higher as well.

Which Option is Right for You?

Choosing the right policy depends on your personal situation and needs. At Best Insurance Services Inc., we offer free policy quotes so you can choose the amount of coverage that works for you. Visit us today to learn more about the many options available to you.

photo credit: russteaches via photopin cc