The Cheapest Policy Is Not Always The One You Want

It's your choiceInsurance agents tell us that they frequently receive calls for a quote, with the caller stating they want the cheapest policy they can find.

There is more to insurance than just the cost of your premium. As home inventory professionals, we have found that many people don’t know there is a difference in the types of coverage they can obtain.

The amount and type of coverage are extremely important if you want to recover sufficiently from a loss caused by fire, theft, or natural disaster.

Of course, it’s wise to compare premiums and choose the least expensive, but only when you’re comparing “like” policies.

The biggest decision to make is whether to purchase a Cash Value or Replacement Value policy because this type of coverage is the main difference in the cost of your premium. With Cash Value, you’ll only receive funds from the insurance company equal to the depreciated value of the item. A Replacement Value policy will pay what it costs to replace the item.

How to Determine Actual Cash Value explains Actual Cash Value: “In the property and casualty insurance industry, Actual Cash Value (ACV) is a method of valuing insured property. It is calculated by subtracting depreciation from the replacement cost. The depreciation is usually calculated by establishing a useful or expected life of the item and determining what percentage of that life remains.”

As an example, let’s say that you purchased a sofa for $2000 and 8 years later you had a house fire. The projected life of a sofa is 10 years. For an Actual Cash Value insurance policy, the insurance company would offer you $400. They will determine this by taking the 8 years you’ve owned the sofa (20% of the 10 years); 20% of $2000 is $400.

In this scenario, you would face a non-recoverable loss of $1600. Now consider all the other contents in your apartment, house, or business and you can realize the total amount of loss you could face. Purchasing the cheapest coverage could cost you tens of thousands if you face a loss. The reason Actual Cash Value policy premiums cost so much less is because of the projected smaller pay-out when a loss occurs.

As a homeowner or renter, look at the furnishings in your living room. What is the cash value of your tables, sofa, and chairs? If you’re a business owner, look around your office and consider what you’d receive for your desk, chairs, and bookcase if you have a cash value policy.

Calculate your potential loss

To help you determine the values of your household or business furnishings, click here to find the estimated life of each item, Then use this calculator to find the Actual Cash Value.