Actual Cash Value vs Replacement Cost: Homeowner Insurance Claim


Hi there, thanks for watching. Today we’re
going to go over replacement cost, what is actual cash value, and we’ll do a little example
of a homeowners insurance claim, describing the difference between the two, and we’ll
tell you exactly what you need to know. First of all, let’s go over replacement cost. Replacement
cost is the cost to replace your property in today’s day with the same kind and quality
materials you had directly before you filed a claim. Usually this kind of policy is a
higher premium than an actual cash value policy. An actual cash value homeowners insurance
policy is replacement cost minus depreciation. Depreciation is the decrease in value over
time, it takes into consideration the cost of wear and tear. So for example, a couch
from Ikea costs $900, but an Ikea couch from Goodwill costs maybe $100. So, it’s just taking
into considering the cost of wear and tear over time. Now, because actual cash value
policies eliminate thousands of dollars for the insurance company to pay, actual cash
value policies yield a much lower premium than replacement cost. So let’s go over an
example, let’s take Michael and Jullian for instance. They go on vacation to Costa Rica
and leave their home in the United States for ten days. Upon return they discover that
they have a burst pipe. The whole downstairs is flooded, they find the burst pipe in the
kitchen, and they stop the water from gushing, and they call their insurance agent right
away. Whenever they file the claim they have an insurance adjuster come out and assess
how much damage is done. The adjuster gives Michael and Jullian an itemized list of all
their damaged property totaling $75,00. Including damaged hardwood floors, carpet, cabinetry,
etc. If they had a replacement cost policy, they would take the $75,000 minus their deductible–and
in this example we’ll just do $3,000–and so the insurance company would write them
a check for $72,000. In an actual cash value situation, they would take the replacement
cost, $75,000, and subtract the depreciation–so for this example we’ll take $30,000–leaving
them with $45,000. Then the insurance company still has to deduct the deductible, so $3,000.
Leaving Michael and Jullian with $42,000 for an actual cash value policy. So what does
that mean, what’s the bottom line? The bottom line is that the replacement cost policy pays
out $72,000, and the actual cash value policy paid out $42,000. The actual cash value policy
paid out $30,000 less than the replacement cost policy. So now you can see why a replacement
cost policy may cost more for insurance than an actual cash value policy. Thanks so much
for watching. This is brought to you by insuranceagentreference.com. Thanks so much and have a great day.

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