Replacement value as a concept is important to know especially in case of home insurance. Generally the perception is to go with the depreciated value of goods when insuring the contents of a home. So, when insuring the contents of your home, you may put the value of a high-end two year TV at Rs 40,000; even though to replace a similar set would cost you Rs 75,000. Now, in case the TV does get damaged, the insurer would pay you the depreciated Rs 40,000 and you would have to fund the balance to replace the TV. However, if you go with the reinstatement or replacement value, wherein you mention the present cost of a similar TV when insuring it, the claim, when raised, would pay for the replacement cost, subject to the sum insured. The importance of replacement value is best understood in case of repairs and replacement.
Impact: Suppose your washing machine requires a new part to be replaced to make it work again, if the replacement price was used, in case of claim, you would not have to pay anything from your pocket. However, if you had taken the depreciated price, you would have to pay for the proportionate repair or replacement cost.
