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What is replacement cost in renters insurance?
An item’s replacement cost is its current retail value — in other words, however much it would cost to buy a new replacement. This is in contrast to the item’s actual cash value, which is the amount that you would get if you sold it in its current condition (e.g. on eBay).
An item’s actual cash value will almost always be lower than its replacement cost, because items lose their value over time. This process is known as depreciation, and it’s why used items in thrift stores sell for less than new items in ordinary retail stores.
An item’s replacement cost can also drop over time
Note that an item’s replacement cost is however much it would take to purchase it now, which might be less than you originally spent on it.
In particular, electronics often have very high retail prices when they’re first released, but become cheaper over the years until they’re finally discontinued.
For example, let’s say you bought the iPhone 11 for $999 when it first came out. Two years later, someone steals it, but by now, you can buy a new iPhone 11 for just $799. This means that your lost item’s replacement cost is $799, not $999.
Replacement cost policies vs. actual cash value policies
There are two types of renters insurance policies: replacement cost policies and actual cash value policies. Predictably, when you file a personal property coverage claim, the policy you have determines whether your insurer will reimburse you for an item’s replacement cost or its actual cash value.
What is a replacement cost policy?
With a replacement cost policy, if your possessions are damaged or lost, your insurer will reimburse you for their full replacement cost, as the policy’s name suggests.
For example, here’s how renters insurance will cover your TV if you have a replacement cost policy. If a power surge destroys your three-year-old 40” Smart TV, your insurer will send you a check or wire you money to cover the cost of a brand-new 40” Smart TV — either the same brand and model, or another TV of similar quality and specifications.
The alternative: actual cash value policies
With an actual cash value policy, your provider will only pay you the amount that your item was worth when you lost it. If you file a claim for your iPhone 11 that you bought two years ago, your provider will send you however much money it takes to buy a three-year-old 40” Smart TV (e.g. on eBay).
Pros and cons of replacement cost policies
Replacement cost policies provide better coverage, but are slightly more expensive than actual cash value policies.
Pro: higher payouts
Replacement cost policies pay out more for lost property. This is because most things start to lose their value as soon as you buy them.
In particular, the following items tend to depreciate quickly:
- Computers and other electronics
- Sports equipment
- Home appliances (refrigerators, washing machines, etc.)
- Jewelry (especially diamonds)
If you own a lot of those items — especially if the appliances and furniture in your apartment belong to you and not your landlord — you should strongly consider getting a replacement cost policy.
Con: more expensive
The disadvantage of replacement cost policies is that they have higher premiums than actual cash value policies — about 10% higher, to be precise.
However, renters insurance is so cheap that the difference isn’t very pronounced. Renters insurance costs just around $15 per month, which means that a replacement cost policy really only costs about $1.50 more per month on average, or less than $20 per year.
Is replacement cost or actual cash value better?
Getting a replacement cost policy is a better idea in most circumstances. As mentioned, renters insurance is so cheap that opting for more comprehensive coverage is usually worth it, even if it means paying slightly higher premiums.
We only recommend choosing an actual cash value policy in the following circumstances:
- You buy most of your things secondhand: If you love to go thrift shopping and rarely buy things for their retail price anyway, an actual cash value policy might make sense for you.
- You’re not interested in personal property coverage at all: If you’re mainly interested in the other types of coverage provided by renters insurance, such as personal liability protection, it might make sense to shave a few dollars off your premiums each month by choosing less comprehensive personal property coverage.
How to calculate an item’s replacement cost value
Calculating the replacement cost of most items is relatively simple. For many items, all you have to do is check whether it’s still being produced. If it is, just look up your model’s current retail price — that’s your item’s replacement cost.
If an item is no longer being produced, it’s considered obsolete. To figure out the replacement cost of an obsolete item, look up what similar products of equivalent quality are retailing for.
For example, if you want to file a claim for a particular model of laptop that’s been discontinued, look up laptops from other makers with those specifications. It doesn’t have to be an exact match; just get as close as you can.
Items that appreciate in value
Some items, including works of art, antiques, baseball cards, and wines, can actually increase in value after you buy them.
In theory, with a replacement cost policy, your provider will cover the item’s appreciated value. In practice, items like this often have sub-limits, or special caps on how much your provider will pay for them. For instance, you might have a policy that provides $30,000 in personal property coverage, but only $2,500 for rare works of art.
You should talk to your insurance company about these items. You might need to buy an addition to your policy, called a rider, to fully cover them.
How to file a replacement cost claim
Filing a renters insurance claim with a replacement cost policy is pretty straightforward. It’s a five-step process, but you only have to take an active role in a few of the steps.
Steps to filing a claim
- Notify your insurance company about the loss
- Wait for an adjuster to review your claim
- Receive an initial actual cash value payment
- Submit proof you replaced the lost items
- Receive the full reimbursement
Step 1: Notify your insurance company about the lost items
When you file a personal property coverage claim, you should contact your insurance company as soon as possible after the loss. Most insurance companies require you to file a claim within 48 to 72 hours.
Provide the insurance company with as much information as possible, including any of the following that you have:
- Pictures of the item before and after the accident
- Pictures of the accident itself
- The item’s model number
Don’t worry if some of those items aren’t applicable — obviously not all items have model numbers, and it’s impossible to take pictures of some causes of loss, like theft. Just provide your insurer with whatever you have.
Step 2: Wait for an insurance adjuster to review your claim
Once you file your claim, an adjuster from your insurance company will determine how much money you should receive. Renters insurance claims usually don’t take long to process, although it can take longer if your insurer has trouble figuring out the item’s value or verifying proof of ownership. Again, provide as much documentation as you can to avoid holdups.
Step 3: Receive an initial actual cash value payment
After the insurance company has reviewed your claim, they’ll send you a check or wire you money to cover part of the item’s total value — usually its (depreciated) actual cash value. They won’t pay out the item’s entire replacement cost until you prove that you have, in fact, replaced it.
Step 4: Submit proof that you replaced the items
After you buy a replacement, you’ll need to submit a receipt to your insurance company in order to receive the rest of the payment. Your insurance company will generally give you several months to pick a replacement and make your purchase.
Step 5: Receive the full payment
After you submit your receipts, your insurer will pay out the difference between the replacement’s purchase price and the initial actual cash value payment you received. At this point, you’ll have been reimbursed for your lost item’s full replacement cost, and the claims process will be complete.
What if I don’t receive the full replacement cost?
If your insurer doesn’t pay out the full replacement cost of an item, it means they’re not convinced it’s currently retailing for as much as you claimed.
Contact your adjuster for more information. If you think they made a mistake, you can ask them to review your claim. Provide all the documentation you can and clearly explain why you believe the settlement was insufficient.