December 22, 2006
Actual Value V/s Replacement Value
By Priya Jestin, Staff Writer
There are a few terms in a homeowner’s insurance policy that you must know more about. I am going to discuss two such terms: Actual Value and Replacement Value.
Actual Value: Actual Value is not the exact value of the item you may have lost. It is the replacement cost of an item less depreciation. For instance, if a fire damages your three-year-old television set, your insurance carrier will first estimate the rate of depreciation. Say your TV has depreciated 35 percent during the three years since you bought it. Now, what your insurer will do is first find out the cost of a comparable new TV set. The insurance company would pay you 35% of the present cost.
Replacement Value: Replacement Value is the amount it costs to replace an item with no deduction for depreciation. Let’s take the example of your television set again. Even though the TV was purchased three years ago, due to advances in technology and a decrease in the price of the TV, the exact same TV can be purchased today for a much lower price. So, the insurance company pays you the lowered amount that would allow you to buy a brand new TV.
You must find out if your insurer pays Actual or Replacement Value for your possessions at the time of a claim. Remember, your premium may change depending on the type of coverage you get. So, check with your insurer before you make your decision.
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