You’ve probably heard personal finance experts say that as soon as you buy a new car and drive it off the lot, it loses ten percent of its value right away. Over time of course, the value depreciates even more, dropping twenty percent in the first year. As you might imagine, this applies to more than just shiny new cars. Almost every item in your home also loses value over time. Though the rates of depreciation may not match an automobile, anyone who has ever gotten a great deal at a yard sale can tell you that a five-year-old couch is cheaper than a brand new one. This is because its value has depreciated over the course of those five years due to the wear and tear caused by routine use.

How does this impact you?

Depreciation can impact you significantly depending on how your homeowners policy is written when it comes to paying a claim, which is the very reason we all buy insurance.

Let’s use an example. Imagine there is a fire which causes a total loss to your home. The structure of the home itself, and all of the contents are destroyed in the blaze. Your policy has an insured amount for your home, that will be used to rebuild it, but what about your contents?

A Homeowner’s policy will also cover the belongings in the home, but how it pays you for them can differ between two different methods.

One is Replacement cost, and one is Actual Cash Value.

Replacement Cost means that you will be paid for each item an amount that it would cost to buy the same or similar item again, if you had to go out today and buy one.

Actual Cash Value will only pay you for the depreciated value of your belongings. Now, the adjuster would not be able to physically inspect your couch or TV since they were all destroyed by the fire. But using depreciation charts based on the estimated lifespan of a given piece of furniture, electronic device, or other item, he or she will be able to arrive at a depreciated value of the lost items.

The couch you paid $2000 for a couple of years ago will be worth considerably less now.

It is also important to keep in mind that even if you have a policy that will pay you for replacement cost of your contents, you will likely receive your claim settlement in two stages. The first will be paid just for the Actual Cash Value of the items lost. Then, after you replace those items, you’ll be reimbursed up to the Replacement cost of those items, so make sure to keep your receipts!

A few tips to make your claim go as smoothly as possible:

1. Know your policy. This is the most important thing. It is much better to know what your policy covers and how it will pay out before you have a claim, than it is to find out after. If you don’t understand the wording of your policy, or you aren’t happy with what it covers, then call your insurance agent to talk about it. It never hurts to go over the details of your policy. If nothing else, you will confirm that you have the right protection and set your mind at ease.

2. Keep receipts. If you have a receipt for all your furniture, appliances, electronics, and the like, you will have a much better starting point in a claim. Make sure to save them in an organized folder that you keep either in a fireproof box or another safe place away from your home, like a safe deposit box. Better yet, scan those receipts and save them to the cloud so they’re easier to access and share with your adjuster.

3. Have a home inventory. Having a detailed list of everything in your home with the brand name, retail price, and even model and serial numbers will make a claim much easier.

No amount of preparation can make an insurance claim a fun experience, but thinking ahead can definitely reduce your headache and potentially the financial burden as well.