What does replacement cost mean?

Answer:
When you buy an insurance policy, you have two main

options for covering the replacement of your property: Actual Cash Value (ACV) or Replacement Cost. These terms can confuse policyholders because “actual cash value” sounds pretty enticing as if you would be receiving piles of cash. But this isn’t the case. In fact, ACV pays you what your items are worth at the time of loss – not what you paid for them and not how much it would cost to replace them.

For example, if you paid $10,000 for a home theatre system five years ago and your insurance company determines that it’s now worth only $3000. You’ll receive $3000 to cover your losses. Only problem is, a comparable home theatre system currently goes for $8000 - $5000 more than what you will receive from the insurance company. On the other hand, if you have replacement cost coverage, the insurance company would pay you enough to replace it in today’s market. In this case, you would receive $8000.


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