Understanding The Difference Between Cash Value and Replacement Cost of Insurance
Understanding The Difference Between Cash Value and Replacement Cost of Insurance Skip to content
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By Hank Coleman Date September 14, 2021FEATURED PROMOTION
As you’ll see in any insurance guide, there are many choices when it comes to choosing the best insurance policy and the features associated with those policies. When you are insuring something like property or real estate, one of the biggest decisions that you have to make is whether you want the insurance company to reimburse you for your potential loss based on its current cash value (Cash Value Insurance) or the amount it would cost to replace the asset (Replacement Cost Insurance). The replacement cost option may be more expensive, but sometimes it can be well worth the added expense.Cash Value Insurance Can Cost You
When you buy a home, for example, and insure it for cash value only, the insurance company will only reimburse you for a loss up to the value of your home. So, if you bought a $150,000 home and it was destroyed in a fire, the insurance company will only pay you the $150,000 original minus your deductible and depreciation as well. On this depreciation aspect, the insurance company will deduct an amount for the wear and tear you have caused on an asset before they pay out the claim. This can significantly reduce your payment and potentially leave you in debt. With cash value, you may end up receiving a significantly less amount of money than your house was worth and insured for, especially if you’ve lived in it for a long time. With cash value insurance, the insurance company will pay whatever it believes your property was worth at the time of the loss.Replacement Cost Clause Insurance Is Worth The Price
Replacement cost insurance is a great clause to have as part of your homeowner’s insurance coverage to ensure that you are completely covered for the entire cost of rebuilding should you have an insurance claim. With a replacement cost term in your insurance contract, depreciation is not deducted from your claim payout. The only thing you are responsible for is your deductible. So, for example, if you have a sixty inch plasma television that you have had for over five years that was stolen from you home, your insurance company would have to pay your claim in the amount of what it costs to replace your television with another comparable sixty inch television minus your deductible.Motley Fool Stock Advisor recommendations have an average return of 397%. For $79 (or just $1.52 per week), join more than 1 million members and don't miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now