Sum Insured vs Replacement Value vs Market Value

Three terms decide how much you are actually paid when you claim on contents insurance: sum insured, replacement value, and market value. They sound similar and are easily confused, and confusing them is one of the simplest ways to end up short at claim time. This guide explains each one in plain language.

For the bigger picture, see contents insurance explained.

Key takeaways

• The sum insured is the ceiling on what your policy pays. You choose it.
• Replacement value is the cost to buy an equivalent item new today.
• Market value is the depreciated value of your existing, used item.
• Most underinsurance comes from setting the sum insured too low, often by basing it on the wrong value.

Sum insured

The sum insured is the maximum your contents policy will pay out, usually for the whole policy and sometimes with sub-limits for certain categories. You set it when you take out or renew cover.

This single figure does most of the work. Set it correctly and a major claim is covered. Set it too low and you are underinsured, which can reduce your payout even on a partial loss if your policy includes an average clause. The whole challenge of contents insurance is choosing this number well, and the reliable way to do that is to base it on an actual inventory of what you own.

Replacement value (new-for-old)

Replacement value is what it would cost to buy an equivalent item brand new at today's prices. A five-year-old television is replaced with a comparable current model, regardless of what the old one would sell for now.

This is the basis for new-for-old cover, and it is usually the figure you want your sum insured to reflect, because after a fire or flood you are buying new replacements, not second-hand ones. Crucially, replacement value is about today's prices, not what you originally paid. Prices change, which is why records drift out of date.

Market value (indemnity)

Market value, also called actual cash value or indemnity value, is the depreciated worth of your existing item. It accounts for age, wear, and condition. That five-year-old television is valued at what a five-year-old television is worth now, which is far less than a new one.

Market value is the basis for indemnity cover. Premiums are lower, but payouts are lower too. We compare the two payout types in new-for-old vs indemnity.

A worked example

Say you bought a laptop three years ago for 2,000 in your local currency.

• What you paid: 2,000. Not directly relevant to a claim.
• Replacement value: the cost of an equivalent new laptop today, perhaps 1,800. This is what new-for-old cover pays.
• Market value: the depreciated value of your used laptop, perhaps 800. This is what indemnity cover pays.

If you set your sum insured based on what you paid years ago, or based on resale value, you can easily end up covered for less than it costs to replace your belongings new.

How to set your cover correctly

1. Decide whether you want new-for-old or indemnity cover.
2. For new-for-old, total the replacement value of your belongings at today's prices.
3. Set your sum insured to match that total, and review it each year as prices change.
4. Confirm the figure with your insurer. WHIG does not recommend a sum insured.

The hard part is step two, because it means knowing the current replacement cost of everything you own. WHIG calculates exactly this: you record a video walkthrough, and it estimates replacement cost per item from current retail pricing and totals it for you. The result is a replacement-value figure you can check against your sum insured. These are estimates, not professional valuations, but they put the right number in front of you instead of a guess. See how WHIG works.