Knowing the difference between actual value and replacement cost renters insurance can help you come to a decision.

Replacement cost vs. Actual value: What’s the difference?

If you're a renter, purchasing a renters insurance policy may be one of the most important things to have.  Not only will you be protecting yourself and your belongings, but renters insurance is also highly affordable.

When you purchase a policy, you'll likely have to make a decision: Should you get actual cash value coverage or replacement cost? These terms may sound like they're one and the same, but they're actually quite different, and it's important to know the distinction between the two so you can make the best choice.

Actual cash value

Typically, no matter what you buy, the value starts to depreciate soon after it's purchased. So when you buy something that's $10 one year, that same item after extensive use isn't as valuable 12 months later should you decide to sell it.

This is how actual cash value coverage works. Under this type of protection, when you make a claim for belongings that are damaged or stolen, your insurer will pay you what it costs to purchase the same item after taking into account depreciation. As a consumer, this type of coverage is usually lower in price than the alternative.

Replacement cost

Speaking of which, the other option you have is replacement cost. In this scenario, the policy is much more straightforward because depreciation isn't factored into the equation. In short, no matter what it cost to buy an item, your insurer will pay you the same price. Many people prefer this kind of protection because they don't have to wonder about compensation. No matter what it costs to have it replaced, that's the amount given. This inherent adjustment factor usually carries a higher premium.

So, which one is the better option? There's no easy answer to that question. As a general rule, you should consult with your insurance agent to get their take on which is best. Your agent will draw from his or her experience, but will also take your personal situation into account. You may also want to talk to your friends or relatives to get their two cents about which one has worked best for them.

There's no right or wrong answer to the question of what type of renters insurance you should buy. But by simply by purchasing coverage you're passing with flying colors.