What Is Replacement Homeowner's Insurance?

Purpose

1. As its name indicates, replacement insurance is designed to replace an insured item at current cost without a deduction for depreciation. In contrast, actual cash value coverage deducts for depreciation, so the policyholder receives less money.

Benefits

2. Policyholders benefit from replacement cost coverage because they can replace an item based on its current market value, which accounts for the cost of inflation. If you expect your home's value to appreciate rapidly, replacement coverage is the better choice.

Considerations

3. While replacement cost coverage premiums are about 10 percent higher than those for actual cash coverage, according to Bankrate.com, policyholders can receive significantly more in the event of a claim. Therefore, replacement cost coverage is a better choice for those who are concerned about rising inflation.

Geography

4. Where you live plays a major role in determining the replacement value as measured by your insurance company. The insurer takes into account its overall claims history in your area, and may place dollar limitations on certain items.

Warning

5. Replacement coverage is typically provided automatically only for the home itself, and not its contents. If you want replacement coverage for personal items, you will likely need to specifically ask for it when applying for coverage.