Differences between Actual Cash Value, Replacement Cost, and Reconstruction Cost in a Homeowner’s Policy

If you want to buy a homeowners insurance policy, you have a big decision to make, and that is to choose between; cash value, replacement cost, and reconstruction cost. Making this decision is very important, yet many people don’t even know the difference. 

Actual Cash Value 

Just like the name implies, the actual cash value is the actual cost of the property you insured. It is the cost of replacement minus depreciation or plus appreciation. Here’s how it works, if you buy a home within a promising environment, and over time the value of the house increases, the money will be higher than what you paid for, but if the value of the house drops, you will be paid less. The actual cash value is not the original money paid, but the property’s current value. The actual cash value fluctuates following the real market cost of the property. 

Replacement Cost

This is the exact amount that will be used to rebuild the house or buy back the house in some situations. The rebuilding will be carried out with the same material used in building the original property. Insurance companies are very strict when it comes to replacement cost; they don’t tolerate any form of upgrades; they expect every quality, design, materials, or layouts are replaced in precisely the same way it was.

Reconstruction cost

This is the cost of rebuilding the house or creating a replica of the former building using the current market price, using the same material at the going supply and demand labor cost rate. Reconstruction cost takes into consideration things like original standard, quality of material, design, and layout, code updates and actual labor cost. The valuation of reconstruction cost is higher than the cost of building a new house because reconstruction cost comprises additional expenses like; demolition cost, cost of removing debris and contractor fees.Imagine a situation in which an entire neighborhood or city burns down. Contractor costs will increase due to simple rules of demand and supply, which makes rebuilding impossible based on cash value or replacement cost. Reconstruction cost accounts for this scenario.

Difference Between Actual Cash Value, Replacement Cost and Reconstruction Cost

• If your building gets damaged, or furniture gets stolen, replacement cost and reconstruction cost pays higher compensation than actual cash value.

• Premiums with replacement and reconstruction costs are more expensive; on the other hand, with actual cost value, you will pay less on premium packages.

• In the case of damage, reconstruction cost pays for full reconstruction of the building; replacement cost pays for a complete replacement of the building, whereas actual cash value pays you precisely the current value of the building. 

• The most expensive policy is reconstruction cost insurance because they pay for full reconstruction and other extra expenses like demolition cost, replacement is the next most expensive. At the same time, the actual cash value is the least costly. 

These three cost policies are different coverage options for homeowners’ insurance when buying an insurance policy. However, most insurance companies offer replacement cost as a default option, so if you’ve bought a homeowner’s insurance before without choosing between these options, there’s a high chance you’ve been using replacement cost all along.

It is important to note that all three policies don’t give room upgrades; they replace exactly what was lost.



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