What is Replacement Insurance?

Replacement insurance is held by many property owners across the country. This form of insurance gives you more peace of mind compared to other forms of insurance. When you need to insure your property, replacement insurance should definitely be considered. So what exactly is replacement insurance and how does it work?

Depreciation

One of the most important terms to understand in the area of replacement insurance is depreciation. When you own an asset, it goes through what is called depreciation. Let's take your car for example. When you buy a car, the value of it goes down over time. In fact, as soon as you drive off the lot, the value of your car goes down. Insurance takes this into account on all assets. They have a chart that tells them exactly how much everything depreciates over time. Therefore, if your car is four years old, they will have a specific value for the car. 

Replacement vs. Actual Cash Value

One important key in insurance is whether or not your policy has replacement cost or actual cash value. Actual cash value takes into consideration the depreciation value of the asset. Let's say that you had a wreck in your new car. If you had an actual cash value policy, the insurance company would deduct depreciation off of the value of the car. Therefore, they would pay you only for the value of what the car was worth in today's dollars. 

On the other hand, a replacement policy works a little differently. It does not take into consideration depreciation. They replace the item with like kind and quality without taking out deduction out of the figure. Using like kind and quality does not always mean that they will replace it with the same exact thing. Companies discontinue products or they are no longer available for multiple reasons. Therefore, like kind and quality means that it is the closest equivalent to the product at the time of the accident.

With replacement cost, the company will actually buy you a new car again to replace for the new car you just lost. They will make every effort to put you back in the same shape you were in before the accident. 

Benefits of Replacement Insurance

The great thing about replacement insurance is that they will get your property back to the condition it was in before the loss. You don't have to worry about losing anything to depreciation along the way. With an actual cash value policy, you are at the hands of the adjuster. Many times, they will say how much something has depreciated and deduct a certain amount because of it. For example, if your carpet was damaged in a flood, they might only give you $1000 for the loss because of depreciation when it costs $2000 to get new carpet. You would then have to come up with the difference out of your own pocket. 

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