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What’s the difference between replacement cost and actual cash value?

When you buy an insurance policy, you may be given the choice of insuring your property at replacement cost value or actual cash value. These are two different calculation methods used to determine how much you will receive from your policy to cover an item if it's lost or damaged.

Both methods have pros and cons. Before choosing one or the other, make sure you discuss the options with your Financial Advisor, who can help you determine which works best to protect your property and stay within your budget.

Replacement cost insurance

If you have replacement cost insurance, your claim will cover the lesser cost of restoring items to their original condition or buying new items of like kind and quality to the ones lost; there will be no deduction for depreciation. This means, if your four-year-old TV is stolen, the claims payment you receive will allow you to buy a new TV with features as similar as possible to the stolen model. The payment you receive may not be the same as you originally paid for the TV, as a similar model is likely cheaper now.

  • Pro: With a replacement cost policy, the money you receive in a claims payment will allow you to adequately replace your lost items.

  • Con: Premiums for replacement cost policies are generally higher than premiums for actual cash value policies.

Actual cash value

If you have an actual cash value policy, your claims payment will be based on the cost of buying items in similar condition to the ones you lost; deprecation will be factored into your payment. For example, if your six-year-old washing machine is damaged in a fire, your insurance company will determine the current value of that machine in its used condition, and provide you with that amount as a payment.

  • Pro: When calculating items at actual cash value, you’ll likely be charged a lower premium.

  • Con: If you purchase new items to replace the ones you’ve lost, you’ll be on the hook for the difference between the insurance payout and the cost of a brand new item. Or, if you choose to replace with an older or used item, you may find it hard to find something satisfactory.

Insurance claims: actual cash value vs. replacement cost

If you have an actual cash value policy, your insurance company will review the list of items you’ve lost, calculate the current value, and provide you with an offer. The more proof you can provide of the items you’ve lost, the easier it will be to determine their current value. That’s why it’s always a good idea to keep an updated home inventory and receipts for expensive items.

With a replacement cost policy, you may receive two payments:

  1. An initial payment for the actual cash value of the lost items.

  2. A second payment for the remainder of the value when you provide proof (receipts) that you replaced those items within a reasonable time. If you don’t replace the items, you won’t be entitled to the second payment – and you’ll only receive the actual cash value payment for the items.

Keep in mind that the amount you receive also depends on the deductibles and limits specified in your policy. You can choose to receive your claims payment by cheque mailed to your home address or through Interac e-Transfer for claims up to $10,000.

Irreplaceable items

No matter what type of policy you have, some possessions are simply irreplaceable. You may own family heirlooms, antiques, art, memorabilia or items with sentimental value that, if lost or damaged, you can never replace. For these items, speak with your Financial Advisor.