It's sad but true – many people only purchase homeowner's insurance because they've borrowed the money to pay for their home and their lenders require them to purchase a homeowner's insurance policy until the home is completely paid for. Therefore, not everyone who purchases a homeowner's insurance policy puts much thought into the ins and outs of the homeowner's insurance policy they purchase.

If you're one of these people, you may not be familiar with the actual cash value coverage and replacement cost coverage offered by homeowner's insurance policies; therefore, you might want to take the following information as a quick education on actual cash value coverage and replacement cost coverage.

There are two basic ways you can be compensated by your homeowner's insurance policy. You may be compensated by the actual cash value or on a replacement cost basis.

If your home or any of its contents are damaged or lost due to a factor covered under your homeowner's insurance policy, you may choose to be compensated by actual cash value coverage. This means you'll be paid the depreciated value of your damaged property. One reason people opt for actual cash value coverage because they can't, or don't want to, replace the property that has been damaged.

On the other hand, if your home or any of its contents are damaged or lost due to a factor covered under your homeowner's insurance policy, you may choose to be compensated by replacement cost coverage. This means you'll be compensated the amount of money it will take to replace the property that has been damaged or lost. The amount you're given is usually the amount it will cost to replace the damaged or lost property at its current price. You will be given the amount it will take to replace the damaged or lost property with another that is similar in type and quality of the one that was damaged or lost.