Actual Cash Value vs. Replacement Cost in Home Insurance
When you buy insurance, you may have to choose between actual cash value and replacement cost. While the actual cash value option will be cheaper, it means your property will be drastically under-insured in a loss.
Actual Cash Value means if your personal property gets destroyed or stolen, you will only be refunded the used value of your property (often called the depreciated value).
Example: You have a big couch that you bought for $3,000 five years ago. It get's destroyed in a fire, and the insurance company says the average life of this type of couch is 10 years. They say they will only pay you $1,500 for this couch because it had 5 useful years remaining. (1/2 the value to buy a new couch)
So basically, you got back.... half a couch
Replacement Cost means your stolen or damaged property will get replaced like new—a full replacement, restoring your property to its original condition. In the above example, you will get a total of $3,000 for the couch.
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