Replacement Cost or Actual Cash Value

Home Insurance Basics

Replacement Cost or Actual Cash ValueRealistic consumers must plan for potential insurance claims by determining and evaluating the difference between these two types of coverage: Replacement Cost and Actual Cash Value (ACV).

Why Compare Replacement Cost Versus Actual Cash Value?
Insurance is there to cover the unexpected. Realistic consumers must plan for potential insurance claims by determining and evaluating the difference between these two types of coverage: Replacement Cost and Actual Cash Value (ACV). The distinct disparity between these two terms will directly influence your insurance settlement, so examine and choose wisely. After you weigh the characteristics of each option, contact your independent insurance agent to ensure your coverage is appropriate for your needs and comfort level. A qualified and licensed agent  will help you make the right choices for your individual situation.

Replacement Cost
Investopedia defines Replacement Value as “the cost to replace the assets of a company or a property of the same or equal value. The replacement cost asset of a company could be a building, stocks, accounts receivable, or liens. This cost can change depending on changes in market value. Also referred to as the price that will have to be paid to replace an existing asset with a similar asset. Amount it will cost to replace the asset in current terms.”

Hank Coleman of Moneycrashers.com states, “Replacement Cost increases the price of an insurance policy. But if you ever need to file a claim, you’ll be glad you have it. If replacement cost insurance is present on the policy, the policyholder may have to provide a value for the items insured in case of claims. Regardless, receipts, video, and itemized inventories stored at a remote location make the insurance claims process an easier and faster one.”

Actual Cash Value
IRMI, an online resource for risks and insurance solutions says, “ACV is typically calculated one of three ways:
(1) the cost to repair or replace the damaged property, minus depreciation;
(2) the damaged property’s ‘fair market value’;
or (3) using the ‘broad evidence rule,’ which calls for considering all relevant evidence of the value of the damaged property.”

Coleman adds, “When you buy a home, for example, and insure it for cash value only, the insurance company will only reimburse you for a loss up to the value of your home. So, if you bought a $150,000 home and it was destroyed in a fire, the insurance company will only pay you the $150,000 original price minus your deductible and depreciation as well. On this depreciation aspect, the insurance company will deduct an amount for the wear and tear you have caused on an asset before they pay out the claim. This can significantly reduce your payment and potentially leave you in debt.”

“The information on this site is general in nature. Any description of coverage is necessarily simplified. Whether a particular loss is covered depends on the specific facts and the provisions, exclusions and limits of the actual policy. Nothing on this site alters the terms or conditions of any policies, nor does it provide any guarantees. You should read your specific policy for a complete description of coverage.”

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