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Replacement Cost vs Actual Cash Value

Replacement Cost vs Actual Cash Value

The best way to be a better consumer of insurance products is to know what your are buying. Insurance terminology may seem vague and/or confusing, and it might be easier to just sign on the dotted line, pay your premium and get on with your life. However, those vague or confusing terms can have a huge impact on how your claim is paid, and what you are able to accomplish with your claim payment after a loss. Two such terms in property insurance are replacement cost and actual cash value. What Is Replacement Cost? Most property policies today are written on a replacement cost basis. Replacement cost is defined as the amount needed to replace an item with like kind and quality without deduction for depreciation. In terms of structure replacement, often the cost to replace an older structure with one of like kind and quality in today’s market would cost more than it did when the structure was built. Labor costs are higher, materials typically cost more, and a new structure may be required to have features that were not required when the original structure was built (an excellent reason to have ordinance or law coverage). For replacement of business or personal property, replacement cost value can be all over the map. An older electronic item may be replaced with like kind or quality for a fraction of the original cost. Some artwork and antiques may increase in value over time. What replacement cost does: replaces the item with like kind or quality up to the face value of the policy. What replacement cost does not do: the...