Think of replacement cost as the ‘Amazon’ price for how your insurance company will value stolen or damaged stuff – it’s how much something of the same make and model would go for today, in a similar condition.
Replacement cost, explained
There are two ways insurance companies can pay you after they approve your claim: actual cash value or replacement cost.
Replacement cost is an estimation of how much it’d be to replace (or repair) something that was damaged or stolen with a similar item available on today’s market with respect to quality, make, model, etc.
The biggest difference between the two is that ‘actual cash value’ takes into account depreciation (the decrease in value overtime), and replacement cost doesn’t. We’ll speak about that more in the following sections.
Replacement cost vs actual cash value
Think about replacement cost as the “Amazon price” of a given item. It’s how much something would cost today of a similar make and model, in a similar condition.
Actual cash value, on the other hand, is like the “eBay price” of used items. It’s how much something would go for today (same make and model), but takes into account depreciation.
Examples of replacement cost
Replacement cost and stolen items
Let’s say you bought an iPhone 7 right when it was released back in 2016 for $649 (the most basic model). Two years later, it was stolen on the train. You sent over all the documentation to your insurance company (original receipt, make and model, and a police report of the incident). The same phone today costs $549.
If your policy covers replacement cost and if you make a claim and it’s approved, you’ll receive a check or wire transfer for that amount in your bank account (minus your deductible, of course).
While you may feel entitled to that extra $100, that’s not how replacement cost works. That’s because it takes into account how much that same item – same make and model or an item of like kind and quality – is sold today.
House repairs and replacement cost
Let’s explore a different angle, where you’d actually receive more money than you put in originally:
Say your best friend is a contractor and hooked you up with a brand new central AC a few years ago for a quarter of the price it’d normally be.
Now, let’s imagine a burst pipe fried your AC after just a year, and you have to replace the whole new system. It’s safe to say that the price of this wouldn’t have dropped so significantly in just a year, so you’d actually get more money to replace the system than you originally put in.
Now make sure to take all of the above into account when you try to calculate your renters insurance cost.
