Replacement cost insurance is insurance which will pay for the replacement of lost, damaged, stolen, or destroyed property. Rather than paying the actual cash value on the property, it pays for people to buy replacements which are considered to be of similar quality and kind. This type of insurance can be expensive and it is not available from all insurance companies because a replacement cost policy can be costly to pay out on.
One example of replacement cost insurance might be home and contents insurance. If a home is destroyed along with its contents, the insurance will provide compensation which allows people to replace it, along with the contents. By contrast, if people had an actual cash value policy, they would receive the replacement cost minus depreciation for the contents, and thus probably would not get a payout large enough to replace everything which was damaged or destroyed.
People may opt for replacement cost insurance when they know that they cannot realistically afford to replace expensive items if they are damaged or destroyed. While the policy costs slightly more, the policyholder can be assured that in the event of an incident, items can be efficiently replaced with the assistance of a payout from the insurance company. Since some items such as furniture can depreciate rapidly, receiving the depreciated value for items lost, stolen, or destroyed may be poor compensation.
There may be a cash limit on a replacement cost insurance policy. This is most commonly seen for items like houses. When there is a limit, people cannot receive compensation over that limit even if they can demonstrate that it would be necessary in order to replace the item with something of like value and kind. People should be aware of such limits and should periodically reassess the terms of their policies to determine whether or not the policy meets their needs.
If an insurance company provides replacement cost insurance, an agent or representative can provide information about the policies available. When shopping for insurance it is a good idea to get quotes from several companies and to ask individual companies for quotes on several different types of policies. This allows people to compare and contrast their options so that they can choose the most cost effective and appropriate choice for their needs. People who are not sure about which policy would be best can discuss the situation with an insurance agent.