Replacement Value Vs. Market Value

Buying insurance for your valuable property is as important as making good purchases in the first place. Homeowners insurance, renters insurance and automobile insurance can protect you from a major financial setback in the event of theft, vandalism or a natural disaster. But each insurance policy requires you to place a value on your property, and this can be more complicated than it seems at first.

Definitions

• In the insurance industry, there are several ways to value property. Replacement value refers to how much it would cost to buy or build a new car, home or item that is identical to the one that's damaged, destroyed or stolen. Market value, also called fair market value or actual cash value (ACV), represents what it would cost to buy a similar replacement item. Both types of values change over time, but only market value accounts for depreciation, which occurs when used items lose value compared to when they were new.

Differences

• The key difference between insuring your property for its replacement value versus its market value is how much you'll pay as an insurance premium, and how much money you'll receive if you make a claim. Insuring for market value will generally lower your premium since the insurance company will only have to pay for the depreciated value of your property. This means that if someone steals your ten-year-old car that cost $20,000 new, you'll only receive a few thousand dollars. In the case of homeowners insurance, replacement value insurance will build you a brand new home on the same site and of the same size, while market value insurance might buy you a similar home in a nearby neighborhood.

Benefits

• Each type of insurance value has its own benefits. Replacement value offers greater protection and ensures that you won't lose any ground financially, aide from your insurance deductible, which you must pay before the insurance company begins to contribute. Market value, on the other hand, can save you a great deal of money each year on your insurance premium while still providing basic coverage.

Drawbacks

• Replacement value insurance costs more, even if you never need to make a claim. It may also be excessive, especially in cases of property with a high likelihood of fast depreciation, such as an automobile or electronic equipment. For example, few insurance companies will recommend insuring a used car for its original value. A homeowners insurance policy that values your home at its market value will require you to search for a new home and submit to the entire buying process, which is much more complicated and time-consuming that having a new home built as a benefit of replacement cost insurance.

Considerations

• There is no rule as to which type of insurance values are best. Instead, it depends on the type of property you own and how much you're willing to spend on insurance premiums, or how much you can afford to pay in the event of a claim. Insurance companies may only be willing to issue a policy for the replacement value of your property, or they may estimate its market value differently than you do. Compare insurance policies from different companies and ask if you're receiving the lowest available rates before committing to a policy that you'll rely on for your financial well-being.