Why Is It Important To Have Replacement Cost vs. Actual Cash Value On My Homeowners Insurance?

Jul 17, 2021 | Personal Insurance

There is no place like home. This famous line was spoken by Dorothy from the Wizard of OZ.  It tells us how important our home is because it is our happy place. It is where we build memories, where we build our dreams, and where we feel the safest and most secure. Our home is where love abounds. 

Protecting our home is important. Accidents do happen. A fire may break out. Thieves can enter our home. There will be hurricanes, floods, tornadoes, and other natural disasters. All of these can destroy our precious home. If one of these problems occur, how do we rebuild our home and replace our possessions?

This is where a homeowner’s insurance for your property can help. To safeguard your home, getting coverage for your property and personal belongings is the wise thing to do. Even if all your possessions are lost and your property is damaged, you will be able to rebuild your home and make new dreams and memories with the right home insurance policy.

Homeowners Insurance Defined

A homeowner’s insurance policy is a type of insurance that insures your home and your possessions in the event of disasters or destructive events. It covers damages to the home and personal assets including interior and exterior damages and theft. A homeowner’s insurance may also offer liability coverage for when an accident occurs in your home or on your property. Earthquakes and floods defined as Acts of God are normally excluded. However, you can get special coverage if you are living in disaster-prone areas. 

It is not required by law that you get home insurance. However, it is wise to get one for your protection. Mortgage companies will require you to have insurance to protect them in their investment just in case your house caught fire or gets damaged by natural disasters like tornadoes and hurricanes. If you fully own your home, it will be your biggest asset and you would want home coverage to protect you from property loss, or in the event of injury in your property, you will be covered. 

Types of Homeowners Insurance Coverage

A homeowner’s insurance is a general term for a series of coverages or policies available for your home or property. Depending on your insurance agency, there are several types of coverage that you can avail of. Two of the most important choices are the Replacement Cost and the Actual Cash Value. These two will actually determine the cost of rebuilding and replacing your possessions. As with other types of insurance, the premium cost will depend on the coverage and the amount limit you can get will depend on the premium that you pay. 

Replacement Cost Coverage

Replacement cost is the amount it would cost to replace damaged property or rebuild an item with similar materials. This type of coverage can include both personal belongings and your home without deducting for depreciation. A good example is a 3-year-old washing machine. If it gets destroyed or stolen, your coverage will allow you to buy a new washing machine with similar features at the cost today even if the damaged one is obviously cheaper now than when you bought it. 

If you have a customized cabinet made and it was destroyed, the cost of building a new one with the current price of supplies and materials will be used instead of the prices when you had it built. Replacement cost will always be at current value and cost. 

Actual Cash Value Coverage

With this coverage, the cost of property damaged or lost will be determined with the depreciation value factored in.  Using the example of the three-year-old washing machine, if you bought the washing machine for USD300.00 three years ago, the value would only be about USD120.00 today. Your coverage will only take the amount of USD120.00 into consideration during evaluation. Since an actual cash value coverage will only reimburse you the depreciated value, your out-of-pocket cost to replace or purchase a new one will be greater.

Things to Consider When Choosing the Right Coverage

Before you decide on what type of coverage you will get for your home and properties, you will need to consider a few things to be able to determine which one is the best for you. Here are some of them:

  1. The Age of your Home – the older your property and belongings are, the more difficult it is to replace or restore. Most home insurance companies will not be able to offer you replacement costs because of the value of antique possessions or materials used to build your home that is authentic and hard to find. You can ask your agent what other coverage is available for you to ensure that you get the same quality when you rebuild.  
  2. Premium Cost – we all know that if you want a higher claim, you need to pay a higher premium. The cost of having your belongings and properties replaced will definitely require more extensive coverage. As such, you will be paying more to ensure that you will be compensated more if you rebuild your home. 
  3. Mixed and Special Coverages – there are certain coverages that you can add on for certain possessions or property. Depending on the value of the item, you can use actual cash value coverage and add the replacement cost coverage on another item. Antiques and other collectibles often have other special coverages that can be purchased. 
  4. Location – if your property or possessions are located in a difficult area prone to disasters and theft, then you might consider getting the replacement cost coverage. 

It is easy to see that getting the Replacement Cost coverage is better than the Actual Cash Value coverage. Although it will be more expensive in premium cost, you will not need to dig deep into your savings when disaster strikes and accidents happen. You will receive a higher payout for your possessions if they are damaged or stolen. You will be able to rebuild your home if it was destroyed by fire or other natural disasters. 

The premium price you will pay to get Replacement Cost coverage will definitely be advantageous to you. Any family needs to be able to restore their home if it was damaged and replace their possessions in case of loss. Rebuilding may take some time but you are assured that you will be able to do it knowing that you have the coverage you need.

Checklist for your Replacement Cost Coverage

  1. Make a detailed list of all your possessions and update them regularly. It is better if you can jot down all the details including descriptions, year bought, and the price. Keep your list in a secured place like a bank deposit box or give copies to your relatives for safekeeping in case your home gets destroyed. This will help you remember all the important things you have that need to be replaced. 
  2. Estimate the cost of rebuilding your home and compare it to the maximum amount your insurer will pay you in case of disasters. Include constructions costs and the materials you need to rebuild. Update every few years.
  3. The location of your property is important when deciding on your home insurance. Living in an area where hurricanes and floods are frequent may need extra coverage. Areas, where there are gangs and local thieves, may also warrant a higher premium. 
  4. Get an experienced insurance agent. Estimating your coverage cost will be a breeze if you have an experienced agent. He or she will be able to include all factors to allow for a more accurate calculation. 
  5. Review the limits on personal possessions like jewelry and antiques. They will be hard to replace and their value may be too much for your coverage. You may need to buy additional policies to cover these items. 
  6. Consider hiring an independent home appraiser. To give you an idea about the property value and construction codes in your area, it’s best to talk with an appraiser. They can also help you assess your coverage needs best. Updates will also be needed so you can adjust your insurance policy accordingly. 

Getting home insurance may seem to be overwhelming. There are many things to consider and a lot of choices to be made. Your home is your biggest asset and protecting it will help you sleep well at night. The cost of getting good coverage may be high but your payout will lessen your out-of-pocket cost. Determining the best coverage will be easy if you have the right insurance company and the right insurance agent. 

And if you are on the lookout for the right insurance company, we are here to give you that peace of mind. Our Homeowners Insurance Experts can help you get the right coverage for your home. Advantage Insurance Solutions can certainly assist you anytime. Call us today toll-free at and let us discuss your home insurance needs.