In the event of a disaster, the terms of your homeowners insurance coverage could mean the difference between rebuilding your life and ending up in a dire financial situation. As such, it’s critical to read the contract closely before purchasing the policy. One of the most important clauses to review regards how you’ll be compensated for missing or damaged property. Whereas some policies reimburse claimants for the actual cash value (ACV) of their items, others provide enough funds to cover the replacement cost. Here’s what you should know about these two approaches so you can decide which to pursue. 

What Do Actual Cash Value Policies Cover?

The actual cash value of an item is how much you could have realistically sold it for had it not been missing or damaged. In short, ACV takes depreciation into account. There are all kinds of formulas for determining ACV. One of the simplest is multiplying the replacement cost by the percentage of its life that remained.

For example, imagine your television was destroyed in a fire. It might cost $2,000 to replace new, but if it was three years old at the time of the fire, perhaps it had just 50% of its time left. As such, you would multiply $2,000 by 0.5 to arrive at $1,000. In other words, your insurer would provide you with $1,000 for the TV, and you would have to cover the rest if you wanted to replace it with a brand new one. 

What Do Replacement Cost Policies Cover?

If your homeowners insurance policy compensates you for the replacement cost, you’ll receive enough to buy new models of the same or similar items should you ever file a claim. Naturally, homeowners insurance policies that compensate for replacement cost instead of ACV are more expensive because they reimburse claimants with more money. In the event of a total catastrophe, though, paying a little extra for your monthly premium could be worth it. 

If you need homeowners insurance for a property in Nebraska, turn to Robert Rung Insurance in Lincoln. Since 1973, this independent insurance agency has been helping individuals throughout Lancaster County protect themselves from the unforeseen. By working with several leading providers, they're able to offer clients comprehensive coverage at competitive rates. To learn more about their offerings, visit them online. To discuss your particular needs with a knowledgeable member of their team, call (402) 483-2279.