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Insurance - Cash Value Or Replacement Cost

Cindy Hartman

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Ask 10 people which coverage they have, and 5 will probably say they don't know. If you are one of the latter, read your policy or call your insurance agent to determine whether you have cash value or replacement cost coverage. Payment from the insurance company will vary widely between the two.

No matter what type of insurance you have, if you can provide a list and photographs (personal property inventory) of your belongings, you'll receive a greater settlement than if you have no documentation to support your claim. In fact, the first thing you'll need to do is create a list for the insurance adjuster, usually room-by-room, of everything that was damaged, destroyed or stolen, plus when it was purchased and what it cost.

This information will be used to determine the amount of payment you'll receive from your insurance provider.

If you have replacement cost coverage, then you should have a favorable settlement when you file a claim. The insurance company will provide payment for the actual cost of purchasing a new, identical or similar item. They will REPLACE the item (once you provide them with a list itemizing your losses).

One exception to this statement is if you reached the limit of your policy. For example, your policy has a limit on many categories of items. Most have a jewelry limit of between $1000 and $3000. If you have a theft of $5000 worth of jewelry, your payment would max out at $3000 unless you have a rider on your policy to cover the additional amount.

Another exception would be if it costs less than the original purchase price to repair or replace the item. This is typical with electronics. A CD player that was purchased when they first hit the shelves cost a great deal more than what you would pay for one now. Your payment would be for the amount that one costs today, not what you paid for it.

Also known as fair market value, the actual cash value takes depreciation into consideration. Most often the insurance company will use a formula to determine your settlement, based on the replacement cost less depreciation. Sometimes these numbers are also based on a combination of the adjuster's opinion after seeing the item (or a photograph) and/or assumed wear and tear.

To explain the depreciation formula further, let's consider the family room sofa, which has a 10-year life. You purchased it 5 years ago for $1000. A tornado destroyed your home and all the contents in it. Since the sofa is 5 years old, it has a depreciated value of $500 (50% of the expected life of this piece of furniture = 50% of the purchase price). This is the amount you'll receive when you submit your insurance claim. However, when you buy a like-quality sofa, let's assume it now costs $1300. Upon submitting your receipt to the insurance company, they will pay you an additional $800 ($1300 less the $500 you already received for the depreciated value).

Policies are different from company to company, and even from person to person. So, check with your agent to make sure you understand what type of coverage you have, and make changes accordingly.

Cindy Hartman is President of Hartman Inventory, a woman-owned business. Visit her website at to discover more reasons you need a business or home inventory. Also view the Turnkey page to learn about the Hartman Inventory Systems, a complete turnkey business package; start and grow your own personal property inventory service. Cindy's blog, at - discusses marketing, management, entrepreneurship and asset inventories.


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