Replacement Coverage (vs. Actual Cash Value)

Insurance companies provide coverage for your property either through "replacement coverage" or "actual cash value coverage." Here's how they work:

Let's say your 10-year-old bed is destroyed in a fire and it's going to cost $1,500 to replace it.

If you have "replacement cost insurance" your insurance company will pay to replace your bed with a new bed of the same quality as the one you lost (less your $250 deductible).

But, if you have "actual cash value insurance" the company will pay what your 10-year-old bed would be worth today (minus your deductible). So, if it would be worth $500, you'd only have $250 to go toward a new bed after your $250 deductible.

While it's more expensive, replacement value insurance will offer you the best coverage.