What is "replacement cost" insurance?

Replacement cost insurance refers to a type of coverage that pays the full cost to replace an item with a new one of similar kind and quality, without deducting any depreciation. This means that in the event of a loss, the insured will receive compensation that reflects the current market value to replace the item, rather than what the item was worth after accounting for depreciation.

For example, if a homeowner has a roof that is damaged and it costs $20,000 to replace it with a new roof, replacement cost insurance would cover that full amount, rather than a lower amount that factors in how much value the old roof had lost over time. This type of insurance is beneficial for policyholders because it ensures they can fully restore or replace damaged property without facing a loss in value due to depreciation.

In contrast, other types of coverage, such as actual cash value, would factor in depreciation, resulting in a lower payout. Thus, the understanding of replacement cost insurance is critical for policyholders looking for adequate coverage that reflects the current costs of replacing their assets.