When a homeowner buys an insurance policy for their home, they are paying to protect both their dwelling and its contents.There are two classifications of payment made by an insurance company in case of any damage to these two types of property: Replacement cost and actual cash value. There is the very significant difference these two categories of claims, especially in the case of primary or total damage. Therefore, a policyholder must understand the process behind these two applications before choosing a plan.

About Insurance Claims: Replacement Cost vs. Actual Cash Value

Replacement Cost and Actual Cash Value are two types insurance alleges that cover personal property that may be lost or damaged. The significant difference between the two comes into play when an insurer pays the related costs for each claim.

Actual Cash Value:

This type of policy pays for an item with an amount equal to the original value of an item minus its depreciation factor.

As an example, take a television set purchased about five years ago, which estimated at $1,000. This item was stolen during a robbery incident at home, but was under a claim. The cost of this set will pay for under policy, but an insurance company will only repay the original cost of the TV minus five years of depreciated value. The insurer decides an item’s depreciation factor. A policyholder should learn this discount factor and calculate its actual cash value with their insurance company before buying any plan.

Replacement Cost:

This policy pays to replace a missing or damaged item for its full price, or with an article of equivalent/greater value.

If the policyholder chooses a replacement cost option, then an insurer will pay an amount equal to the actual cash value of an item, which is meant to pay for a replacement. But if the received amount is not enough to pay for a replacement, an insurer will balance the cost by paying the remaining cost.

In case of any damage to/, total loss of property, this type of insurance option will ensure that the owner will be paid the proper amount to rebuild their home at its current price level. An actual cash value claim will only pay the current value of a home after depreciation, which may not fully cover its repair costs.

In any case, a policyholder should calculate any fees for their plan, and choose their claim correctly.