Your Homeowners Insurance can insure your possessions in two ways. Either for Replacements Cost Coverage or Actual Cash Value Coverage.
An Actual Cash Value policy will pay the cost of replacing your items, in the event of a loss, minus a deduction for depreciation. A Replacement Cost policy will pay you what it takes to replace your items new today, with no deduction for depreciation. This can be a big difference in coverage.
Suppose, for example, that you have a fire in your home and it destroys a 10 year old television set. If you have Replacement Cost coverage on your Homeowners Insurance policy, the insurance company will pay you what it takes to replace the TV with a new one. If you have Actual Cash Value coverage, the policy will only pay part of the cost to replace it because you have used it for the last 10 years and a used television is worth a lot less than its original cost. Imagine applying this to a major loss. Everything from clothing to dishes to furniture.
This can be a major difference in coverage and it normally does not cost very much to add replacement cost coverage to your policy. As a result, we highly recommend purchasing replacement cost coverage on your homeowners or renters insurance policy.