Replacement Cost

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, but all shiny and new.

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.

Just note: you’ll have to pay a few extra $$ on your monthly premium for replacement cost, since it’s more comprehensive than its counterpart.

Replacement cost vs actual cash value

Think about replacement cost as the “Amazon price” of a given item. It’s how much something new would cost today, regardless of how long ago it was made.

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 you opted for replacement cost, 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 – is sold today, but new.

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.