Definition of Replacement Cost Policy

What is a "replacement cost policy"? What is the definition of the term "replacement cost policy"?

You have likely run across the term "replacement cost policy" while looking over your car or house insurance policy.

"Replacement cost" refers to the cost of replacing an item without accounting for depreciation.

The easiest way to explain replacement cost is - what would it cost to replace an item in a store? This is "replacement cost".

Definition and illustration of Replacement Cost policyFor instance, letís say that you bought a 42 inch plasma TV one year ago for $1,000. Over the course of a year, the value of that TV will depreciate.

Letís say that your plasma TV gets stolen in a robbery. Letís also say that you have a replacement cost homeownerís policy.

The house insurance company will replace the TV with one of a like kind and quality or cut you a check for the amount of money that it would cost to buy a TV of like kind and quality.

If you didnít have a replacement cost policy, the insurance company would just award you the actual cash value of the TV, which would take into account depreciation.

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