There are two types of coverage available under a renter’s insurance policy: replacement cost and actual cash value.
Replacement cost is just what it says: the actual cost of replacing an item at today’s prices. Actual cash value, also called market value, is the cost of replacing an item at today’s prices with a deduction for depreciation, or the item’s ‘wear and tear’. Another way to think of actual cash value is the price you would get for an item if you were to sell it in the current market place.
If you’re thinking about buying a rental insurance policy, the two questions you need to ask yourself when considering which type of policy is right for you are, what am I covered for under each policy, and how much will it really cost me?
For example, if you have a computer stolen from your residence, and you have a renter’s insurance policy with actual cash value cover, then the payment you would receive would equal what you would have gotten if you had sold your computer. Given that some items, such as electronics, tend to lose their value quickly, or be replaced by new models on a regular basis, some items may depreciate quickly and their actual cash value may be significantly lower than the cost needed to replace them. If you have a replacement cost policy, then you will be able to purchase a new version of your computer, or the current model equivalent, to replace the one that was stolen.
Most standard renter’s insurance policies automatically cover items only at their actual cash value, so if you want to have replacement cost coverage, you will need to make sure that your policy reflects this. Replacement cost policies will cost more than actual cash value ones, and that means you will be paying higher premiums for this type of coverage. Over time, you may be paying more than the difference between replacement cost and actual cash value of your belongings.
However, one mistake many people make with renter’s insurance is that they consider only the cost of policy premiums when looking at the costs of a policy. The best way to calculate how much a renter’s insurance policy is worth to you is to add up the total purchase price of your belongings, and then calculate how much you would receive for them under an actual cash value policy compared to how much you would get if you have replacement cost coverage.
If you don’t wish to pay higher premiums for replacement cost, instead of actual cash value, on your renter’s insurance policy, then consider that you will need to pay the difference yourself to replace your belongings at current prices if something happens to them and you receive the actual cash value.