You probably know that insurance companies are good about reimbursing you when you have suffered a loss that falls within the parameters of your home insurance policy. But how much do you know about the mechanics of that reimbursement?

What you might not realize is that your policy may entitle you to one of two different methods of calculating your insurance benefit. These methods include calculating for either replacement costs or actual cash value reimbursement, and there is a very big difference between the two.

Actual Cash Value

Actual cash value refers to the value of your property, generally acknowledged as fair market value. Fair market value is understood to be the amount that a fully knowledgeable buyer would pay for your property if he or she was given a reasonable period of time to decide to do so. It takes into consideration any depreciation within your home, changes in property value, and upgrades you might have made to improve its value.

Receiving the actual cash value for your home (assuming your home insurance policy limits permit that) is great for making you financially whole again and keeping your net worth in stasis, but it might not give you enough to rebuild your home on the existing property because your actual cash value might not be equal to the costs of rebuilding. This means you would either need to buy a new home or pay for some of the rebuilding expenses out of your own pocket.

Replacement Cost

Being paid replacement costs within your home insurance policy instead of actual cash values mean that you will be paid the cost to rebuild your home after a total loss, rather than being limited to receive only its actual cash value. In most cases, replacement costs can be paid when you’ve insured your dwelling for at least 80 percent of the full replacement cost of the property. This ensures that you and your family can replace your home by rebuilding on the same property, and not hurt your standard of living. Replacement costs may exceed actual cash value, but always remember that the benefit you receive will not exceed those in your policy’s limits.

If you already have a home insurance policy and just aren’t sure which reimbursement type you are entitled to, read your policy over. You can also call your agent or insurance company to find out for certain. If you are still shopping for home insurance, ask your agent about which benefit calculation method he or she would suggest.