When establishing the terms of agreement for your home insurance policy, your provider will allow you to take advantage of actual cash value or actual replacement coverage. To find out which option is the most cost effective choice, evaluate the defining elements of each coverage plan.
Home Insurance and Actual Cash Value Policies
If you’re hoping to save for some extra spending money, then an actual cash value home insurance plan will most likely be the most affordable option. Actual cash value plans provide home owners with cash-limits for the replacement / repair of any damages. Ultimately, if a cash value plan has an agreed upon $5,000 replacement limit, then the insurance company will only pay this maximum reimbursement amount-even if the costs of damages / repairs exceed $5,000. Furthermore, this type of plan will generally only reimburse a home owner for the depreciated value of any damaged/ stolen items. Therefore, if you bought a brand new 30″ top of the line television for $3,000, only to later have this television stolen from your home, then be aware that you may not be reimbursed for your full $3,000 expenses. Essentially, if the TV is found to be available at a lower price, then the insurance company will only reimburse you for the reduced cost of replacing your original television.
Home Insurance Replacement Cost Coverage
Unlike actual cash value plans, replacement cost home insurance policies generally provide home owners with two distinct forms of reimbursement: true replacement or functional replacement. By opting for true or functional replacement plans, a home owner will generally be entitled to the actual replacement of an item, while a cash value plan will more generally compensate a home owner with some form of cash reimbursement.
- True Replacement – With true replacement, a provider will compensate a home owner with the same quality product(s). For example, if your “Brand A” television is stolen / damaged, then your provider will compensate with the same (or better) “Brand A” television (of the same quality)
- Functional Replacement - Unlike true replacement, functional replacement only provides home owners with a “similar” brand / quality of product that will serve to “functionally” replace the stolen / damaged product. For example, if your “Brand A” television is stolen / damaged, then your provider will compensate you with a replacement television that will most likely NOT be of the same quality / brand. This option tends to be more affordable for both home owners and insurance providers, as a functional replacement of a product is typically less expensive than a true replacement.
