Cash Value vs Replacement Cost

We have experienced a few years of 'extreme' disasters, with numerous hurricanes, frequent tornadoes and an unusually high number of house fires. And even with these occurring, nearly half of U.S. consumers are insufficiently prepared — in terms of their insurance coverage — to deal with potential losses, according to new research by the National Association of Insurance Commissioners (NAIC).

“Many consumers are not able to recover after a disaster because they don’t realize how depreciation can impact their assets,” NAIC President Sandy Praeger said. “It is important that consumers understand the implications of purchasing an actual cash value policy vs. replacement cost insurance. In the event of a disaster, the difference could mean thousands of dollars in payout.”

Actual cash value is the amount it would take to replace the contents of your home or business, after depreciation. For example, a sofa has a 10-year life. If it is 5 years old when you experienced your loss, you'll receive approximately 50% of it's value. Replacement cost is the amount it would take to replace your belongings with items of similar quality, without deducting for depreciation. However, this is usually paid out in a 2-step process. You'll first receive the cash value (in this example, 50%), then after purchasing a new sofa, and submitting the receipt, you'll receive the balance.

Check your policy, and discuss your coverage with your insurance agent. Make sure you have the type of coverage you need.