Insurance coverage: cash value

Yesterday's topic was replacement value insurance coverage. Replacement value coverage will provide replacement cost for damaged or stolen items after a thorough list is provided to the insurance company.

There is a huge difference in insurance settlements between replacement value and CASH VALUE, also known as fair market value. The actual cash value takes depreciation into consideration, paying you the amount your contents are worth the day of the loss. Most often the insurance company will use a formula to determine your settlement, based on the replacement cost less depreciation. Sometimes these numbers are also based on a combination of the adjuster’s opinion after seeing the item (or a photograph) and/or assumed wear and tear.

To explain this further, let’s consider the family room sofa, which has a 10-year life. As in yesterday's example, you purchased it 5 years ago for $1000. A tornado destroyed your home and all the contents in it. Since the sofa is 5 years old, it has a depreciated value of $500 (50% of the expected life of this piece of furniture = 50% of the purchase price). This is the amount you’ll receive for your sofa when you submit your insurance claim. When you purchase a new one ($1200 in our example), you'll have to come up with the $700 if you want to purchase a similar sofa. You can see that a replacement value policy provides much better coverage than a cash value policy. Though replacement value policies cost more than cash value, it is well worth the difference. Consider the amount of money you'd need to add to your cash value policy when you have a claim.

Policies are different from company to company. Check with your insurance agent to make sure you know what type of coverage you have. Only you can make the decision that is right for you.