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Veronica, New York

Actual Cash Value

When shopping for tenants insurance, it is important that you are familiar with some of the different insurance terms used in the policy. You need to have a good estimation of what you will be paid should you have to file a claim.

In general, you are insured under a rental insurance agreement in one of two ways. Your policy will either be an actual cash value policy or a replacement cost policy. Under a replacement cost policy, your insurance company will reimburse you the amount of money it would take to purchase an item comparable to the one lost on today's market. Under an actual cash value policy, the insurance company will reimburse you the price of replacing the item minus depreciation. Depreciation is the reduction in value of an item over time due to wear and tear, obsolescence and age. Because depreciation is not taken into account under a replacement cost policy that type of policy is more financially beneficial to you, the insured.

Insurance companies prefer to pay under an actual cash value scenario for obvious reasons. But, there are times when purchasing a cash value policy could be more beneficial to the insured. On average, premiums for a cash value policy cost about 10%-20% less than a replacement cost policy. If you were in a situation where most of the large, expensive items that were to be covered under the policy; oven, washer and dryer, were brand new and had no wear and tear, it may be advantageous to take out a cash value policy for the first year or two. You would be saving money on premiums while still retaining coverage were disaster to strike. Remember, the older those appliances get the less beneficial a cash value policy would be.

In the long term, a replacement cost policy will provide you with the best overall security. It is important to note that both types of rental insurance policies are very reasonably priced. Also, both types of policies offer at least some coverage in the event of theft or natural disaster. No matter which type of policy you choose, rental insurance is one of the easiest, most affordable ways to protect yourself financially.