Here’s an insurance term that’s actually worth understanding: replacement cost versus actual cash value. The easiest way to understand the difference is to think about your roof. Suppose a storm destroys a roof that is 15 years old and replacing it today costs $20,000. Having $20,000 worth of damage doesn’t necessarily mean your insurance company is going to pay $20,000. How your policy is written can make a huge difference.
With replacement cost coverage, your policy is designed to pay the cost of replacing damaged property with new property of similar kind and quality, subject to your deductible and the terms of your policy. Actual cash value works differently because it takes age and wear into consideration. In our $20,000 roof example, the insurance company might determine that your older roof has lost a significant portion of its value over the years. Instead of basing the final payment on the full replacement cost, the settlement could be thousands maybe tens of thousands of dollars less. That difference comes out of your pocket.
This doesn’t apply only to roofs. The way your policy values your home and belongings can become extremely important after a major fire, tornado, hailstorm, or other covered loss. Two insurance quotes can have similar-looking prices while providing very different protection when it’s time to file a claim. That’s why comparing insurance based only on price can be a mistake. Ask us how your current policy handles replacement cost and depreciation—especially on your roof. It’s much better to understand how your policy works before you have a claim than to learn about it afterward.
Stay Tuned For Other Great Reads In This Month’s Newsletter
- Is Your Auto Liability Limit High Enough for Today’s Accident Costs?
- Who Is Actually Covered to Drive Your Cars?
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