What is recoverable depreciation?

When purchasing a new homeowners or renters insurance policy, understanding what your true level of coverage for replacement of your personal belongings is very important. One term that must be fully understood is recoverable depreciation. Recoverable depreciation is the difference between the cost to replace an item and the item's actual cash value.

Every insurance company will determine what the depreciated value of an item is. Generally speaking, this is based on a predetermined fixed depreciation cycle of commonly depreciated items, such as a laptop computer or the roof of your home. If your item is destroyed and you have had it for a while, it could be expensive to replace the item if you do not have coverage for the recoverable depreciation.

To ensure that you have coverage for the recoverable depreciation, you should pay attention to whether you have coverage for the replacement cost or the actual cash value. If you have coverage for the replacement cost, you will receive a much larger insurance reimbursement from your insurance company, which should cover the cost to get a new version of the item that was damaged. While having this excess coverage is important, it does also lead to a much higher insurance premium than if you simply had actual cash value replacement coverage.