Replacement Cost

Insuring your property for its replacement cost means your provider pays to repair or replace your damaged property without subtracting its depreciation.

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What Is Replacement Cost Coverage?

Replacement cost coverage is one way insurance companies protect your property. Insuring your property for its replacement cost means your provider pays to repair or replace your damaged property without subtracting the property's depreciation.

How Does Replacement Cost Coverage Work?

The decisions you make when your first buy home insurance impact how much your provider pays on a claim. Replacement cost coverage is a good example of this. 

Insuring your property for its replacement cost value means your provider pays to replace it with property that is similar in quality. Your other option is to insure your property for its actual cash value (ACV). Insuring your home for its ACV means your provider deducts depreciation from your payout.

Many home insurance companies automatically offer replacement cost coverage for the structure of your home. Your personal property, like appliances, fixtures, and furniture, is usually insured for its actual cash value. That doesn’t mean you can’t opt for replacement cost coverage; you may just have to ask for it.

Even when you get replacement cost coverage, you may be surprised by your payout after a claim. That’s because most insurance companies first pay your property’s actual cash value, then reimburse you once you’ve replaced or repaired the item.

Let’s say you bought a new flat-screen television for $2,000 three years ago. Unfortunately, it’s stolen, so you file a claim on your home insurance. With an actual cash value policy, your insurer subtracts a certain percentage for three years of depreciation. Now here’s what happens if you have replacement cost coverage:

  • Your insurance provider sends an initial payment for the TV’s depreciated value.
  • You purchase a new television similar to the stolen one and submit the receipt to your insurer.
  • Your insurance provider pays you the difference.

The price of your replacement property may be more the original item’s price tag, but your home insurer usually still pays. Just be sure to check your policy terms. Replacement cost coverage payouts cannot exceed your policy property limits.

Insurers also have a minimum requirement for replacement cost coverage. This is called the 80/20 rule. Essentially, your insurance policy must cover 80 percent of your home’s replacement value. Come up short, and your insurance provider may only pay a portion of the replacement costs.

Do I Need Replacement Cost Coverage?

You might want to invest in the replacement cost coverage if:

  • You can't make repairs on your own. A person with carpentry or construction experience may be able to forgo replacement cost coverage. But if you're all thumbs when it comes to repairs, then broader coverage might make sense.
  • You have valuable personal property. Expensive and hard-to-replace items may justify the additional expense. Take a home inventory to see just how much you may be on the hook for after a disaster.
  • You invested in new property. You may want the extra protection for additions, renovations, and upgrades.
  • The peace of mind is worth it. Replacement cost coverage does cost a little more than ACV insurance, but it offers significantly higher payouts when you need to make a claim.

Getting an actual cash value policy may save you money on premiums, but it can leave you underinsured when it’s time to file a claim. Do your research and talk to an agent to make sure you’re adequately insured.

How to Get Replacement Cost Coverage

First, you can buy your home insurance through Kin. We only sell replacement cost insurance. But if you’re going through another agent, ask if your policy is written on a replacement-cost basis.

If you already have a policy, you might want to check the coverage. The information you need is typically listed under Coverage C (personal property protection). Review this section with your agent and talk to them about what coverage is appropriate for you.

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