Comparing the different home and auto insurance plans available is the best way to match yourself up with the policy that’s right for you. But sometimes, language can get in the way of helping you arrive at a perfectly sound decision—and what might sound good on paper today could be revealed as a horrible choice if you actually use your insurance. One of the most important terms you’ll need to be familiar with when shopping for car and homeowner insurance quotes is “replacement cost.”
What Does Replacement Cost Mean?
Essentially, replacement cost determines how your insurance company will reimburse you if your home or your vehicle are damaged beyond any reasonable ability to repair them. This is what happens when a car or a home is “totaled” and the insurance company decides it would be cheaper to offer you money for replacement instead of repair. If your insurance policy offers replacement cost over actual cash value, you’re in good shape. The actual cash value method figures in depreciation, whereas replacement cost doesn’t.
Premium Price Differences
Needless to say, the insurance companies aren’t stupid—by offering you a policy that guarantees they’ll pay you for the full value of what it takes to replace your car or home, they know they’re putting themselves in a position to pay out substantially more than they would by offering actual cash value. They make up for this difference by charging more for replacement value coverage, and in some cases you can only get actual cash value coverage. Keep this front and center to all of your decisions when getting homeowner insurance quotes. If you own a lot of expensive items, choosing the insurer that offers you replacement value is the only smart option.