Insuring and protecting your home is vital. While some homeowner’s policies pay out the “actual cash value” of a damaged or lost item in your home, most policies pay for the replacement cost of an item. But what exactly is actual cash value?

What Is Actual Cash Value?
An actual cash value policy is used to determine the amount you will get if a covered item is damaged or lost. If you have actual cash value coverage, the amount of money you will get is based on the item’s value minus any depreciation. However, you need to read the clause in your contract to determine how your insurance company will value an item following a loss.

How Does The Actual Cash Value Policy Differ From Replacement Cost?
The actual cash value coverage pays what damage or lost item is worth, while the replacement cost pays to replace the same item. For instance, if you file a claim for a 55 inches television, that costs $1,000 three years. Every year 5% depreciation would apply. That means 3 years x 5% per year = 15% ($150) depreciation. The insurance company may pay $850.

For the replacement cost policy, you will get the amount it would cost you to purchase the same TV in today’s marketplace.

Why Should I Choose Actual Cash Value?
The answer is simple: money. An actual cash value policy is an affordable option. But, it may not offer adequate coverage if something is damaged. The payout you’ll get from your insurance company will likely be higher.