Many people are probably familiar with the concept of depreciation in relation to taxes. They may not realize that depreciation can also affect the amount that they are paid on house insurance claims.

The concept of depreciation is a fairly simple one, the value of most possessions decreases over time. A good example of depreciation is the difference between new and used cars. Used cars cost less because they have depreciated in value.

Depreciation can affect insurance claims because many policies will pay the cash value for the replacement of possessions. If your insurance policy states that it will pay cash value to replace goods that have been lost or destroyed – the amount paid out will be based on depreciation.

That means that you will receive less for items such as appliances or electronics. If your four-year-old computer was destroyed in a fire, the amount you would receive would equal the value of a four-year-old computer and would not provide enough money to purchase a new computer.

This means that you should check your home insurance policy and see whether it covers replacement cost or cash value. Most homeowners should purchase insurance to cover the replacement cost rather than the cash value because of depreciation.

Replacement Cost vs. Cash Value
Replacement cost is a much better deal for most homeowners than cash value. A replacement cost policy will pay the full price of replacing items lost in an emergency rather than the depreciated cash value.

This means that a person who lost their five-year-old refrigerator in a fire would get enough money to buy a comparable new refrigerator. Most families need replacement cost coverage so they can replace items like appliances after an emergency.

Persons who use their computer to work at home should definitely have replacement cost insurance. Such a policy would cover the cost of a new computer, while a cash value policy might not.

Items that Do Not Depreciate
Many house insurance policies specifically exclude items that do not depreciate from coverage. Such items can include jewelry and collectibles such as stamps, coins, baseball cards, comic books, antiques, and certain kinds of vehicles. The value of such items is determined by the market rather than depreciation, so they can only be insured with cash value coverage.

It would be more advantageous for a person to insure such items with special coverage that covers the cash value of the items. This special coverage can usually be added to your house insurance policy in the form of a rider. 


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