Typically, unless you request otherwise during the process of obtaining insurance, your personal belongings will be covered only for their "Actual Cash Value." Many insurers offer you an option of "Replacement Cost" coverage but it's typically at a slightly higher premium.

So what's the difference between Replacement Cost and Actual Cash Value coverage?

Replacement cost coverage is exactly what it sounds like. It’s the cost it would take “today” to replace an item with one of equal type and quality, without factoring in depreciation. What this means is that the insurance company would not deduct from your refund because your item is several years old, or because it has regular wear and tear. Although many insurers may offer replacement cost coverage, each one may have different levels of coverage, so you would want to check with your insurer to see what the coverage’s are for your area and what limits there may be. For example, some insurers may set a maximum to protect themselves from being overexposed.

Actual cash value coverage is what it would cost to repair or replace a damaged or destroyed item, after a deduction for depreciation. Your insurer will deduct from today’s replacement cost using a formula that takes into account the age and wear and tear of the item. The final value is what you receive as payment.

Although the upfront and recurring costs of replacement cost coverage is typically more than actual cash value coverage, you need to weigh it against what you could potentially have to pay out in the end to cover the gap between what your insurer pays you and what it costs to replace an item. Keep in mind the older the item, the larger the gap you’ll likely have to cover personally.

Creating and maintaining a home inventory will be beneficial when shopping around for insurance or performing regular reviews with your insurance agent. It will certainly prove invaluable if you ever find yourself unfortunate enough to have to file a claim.