Homeowners’ insurance offers protection in the event your house or belongings are damaged. However, did you know there are multiple ways that policyholders are compensated? Understanding the differences between actual cash value and replacement costs are crucial, as you may receive less compensation than you’re expecting. The following information can help you determine the best homeowners’ insurance policy option for your needs.

Actual Cash Value

While there is some variance to what actual cash value means, it’s often understood as the replacement cost minus depreciation. How depreciation is calculated is up to the discretion of the insurance company in question, but wear and tear, age, and the type of item all factor in.

With older items, actual cash value can result in a settlement less than expected. For instance, if an item is no longer available and you’re forced to seek out a newer version, the money afforded by your homeowners’ insurance policy might not be sufficient.

Replacement Cost

Conversely, replacement cost is defined as a payout equal to the cost for actually replacing the item. This removes the depreciation factor and instead focuses on compensating a policyholder so that he or she can purchase an item of similar value. While this is much more reassuring regarding compensation, you should be aware of how replacement cost is usually carried out.

Once you’ve provided the requested information on your belongings, your insurance agent will provide payment satisfying actual cash value. You will only receive the remaining portion of your funding once you actively replace the items you lost. This entails submitting expenses for new items as they’re purchased, after which you’ll be duly reimbursed.

Because homeowners’ insurance can be complex, it’s best to work with an agent that can explain concepts in a clear and concise manner. This is exactly what Northern Kentucky Home Insurance Company offers to clients in Kentucky, which is why they’ve been a leading local insurance provider for more than a century. Whether you need a renter’s insurance policy or are in the market for commercial coverage for a small business, these agents will walk you through available products until you find the perfect fit. If you’d like to get a quote today, feel free to call (859) 635-2500. You can also learn more about replacement cost and actual cash value by visiting them online.