Renters Insurance Actual Cash value vs Replacement Cost

Shopping for renter’s insurance may seem overwhelming, however it is a necessity. Although landlords are required by law to insure a property, if there were a fire, flood, break in, or any other type of natural disaster in your unit, your property manager’s insurance would not cover any of your personal property.

There are two basic types of renters insurance: actual cash value coverage and replacement cost coverage. Actual cash value coverage reimburses the client for all of the items in their house after depreciation, where as replacement cost coverage reimburses clients for all of their items at new market value. There is no depreciation.

One advantage of the actual cash value policy is that your premiums will be lower than they would with replacement cost coverage. Since the insurance company would pay out less if you filed a claim, the monthly payments are pretty minimal.

A disadvantage to actual cash value coverage is that all of your items are depreciated. If you are interested in an actual cash value policy, you should discuss with your perspective insurance company what kind of depreciation scale they use. Some people are shocked to find that all of their items get slashed to 50% value after a few short months. Items you have had for years may be only with 10% of their replacement cost after depreciation.

Another disadvantage to actual cost value is that there is no detailed definition of what the actual cash value of each item will be. Most insurance companies price items to what they feel is a comparable item on the market. Remember however that insurance companies are in business to make money. Ask your insurance provider if they use prices of new comparable models or used versions. For instance, if an insurance company were to price a TV you’ve had for ten years, would they price that exact model which may only be worth $10 on eBay? Or would they price a brand and model comparable to the one you own at Best Buy?

Replacements cost coverage policies are generally less of a gamble because they do not depreciate your items like an actual cash value policy does. In effect, you will get whole value for all of them items in your household under the assumption you intend to replace everything. If you do opt for replacement value, again, it is best to clarify in writing what insurance uses to calculate replacement cost, as electronics depreciate quickly. As with actual cash value policies, it is important to clarify if they replace with comparable brand new models, or used prices.

The one disadvantage to replacement cost coverage policies is that your premium will be higher.

An example of someone that should choose an actual cash value coverage policy is someone who has minimal items and lives on a budget. Replacement cost coverage policies are ideal for people who have expensive equipment, jewels, collectibles or anything with high value, it’s best to pay a higher monthly premium and rest assured all your property will be taken care of. Before purchasing any policy, make sure to ask your insurance provider any questions. If you need clarification ask for an addendum to be attached to your contract.