The difference between replacement and actual cost value

By HUB SmartCoverage Team on October 30th, 2017

When shopping for a home insurance policy, you’ll have several decisions to make. Which insurance provider should I go with? Should I go with basic, broad, or comprehensive home insurance?

Another important decision you’ll face is whether to insure your property at replacement value or actual cost value. Both are different calculation methods used to figure out how much of a settlement you’d receive if you made a claim should your property be damaged or lost. It’s important to understand how they’re calculated before deciding on one. Let’s take a look at both of them to help you decide which one is right for your family.

Replacement Value

Replacement value is the cream of the crop when it comes to insurance policies. If your policy covers replacement value, your claim will cover the expense of buying an item that’s brand-new. (It doesn’t take into account any deduction for depreciation.) Let’s say your flat screen TV is destroyed in a fire. If the fire is covered under your policy and you have replacement value, you’ll get a brad-new TV set, even if your TV set is five years old.

Actual Cost Value

With an actual cost value policy, you aren’t as well protected as a replacement value policy. Unlike replacement value, which “replaces” your old item and buys you a brand new TV, actual cost value will only give you the funds to buy a TV in a similar condition (in the above example, another five year old TV set). That’s because depreciation is factored into your payout.

Why would you choose actual cost value coverage over replacement value coverage? To save money. Your home insurance premiums would be lower under a home insurance policy that offers actual cost value protection over replacement value since the payout would be a lot less for your insurer should you file a claim.

If you’re looking to save money on your home insurance policy, you might consider raising the deductible. That way you’d still receive decent protection and may still be able to afford replacement value coverage.

Market Value

What if your home were to burn down or be destroyed by a weather event? With weather related disasters a lot more frequent, you’ll want to know how much you’re covered for.

It’s important to note that the market value of your home is different from its replacement value. Under a home insurance policy that offers replacement value coverage, it’d only cover the cost of materials and labour needed to reconstruct your home. What it wouldn’t cover is your lot, just the structures on your lot. Keep this in mind when shopping for a home insurance policy.

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