Replacement Cost vs. Actual Cash Value in Insurance
You might hear your broker mention “replacement cost” or “actual cash value” when talking about policy options. These are two of the most common ways insurers calculate the amount you’ll receive from a home or car insurance claim. But what does that mean for you?
Replacement Cost
If your policy says it will cover the replacement cost of an item that is lost or damaged, you’ll receive the cost of its replacement at the time of the loss—in other words, the amount of money you’d need to replace it with a new product of similar kind and quality.
Insurance is designed to get you back to the same position you were in before you suffered a loss, so your insurer will work hard and do the research to make sure that happens.
Actual Cash Value
Unlike replacement cost, actual cash value coverage gives you the dollar amount equal to what the lost or damaged item is worth at the time of the loss. Actual cash value considers the original price paid as well as depreciation and physical condition. Due to wear and tear, an item’s value naturally decreases; depending on the item, you’ll most likely receive less than you paid for it.
Most insurance companies use standard depreciation guidelines and professional appraisers to make sure the actual cash value is correct.
Home Insurance & Replacement Cost
Say your 6-year-old TV is stolen—this will be covered under your personal property in your home insurance policy. Replacement cost coverage will reimburse you for the price of a new TV today, while actual cash value coverage would only reimburse you for the value of the TV after 6 years of wear and tear (which might not cover a new one).
Luckily, most home insurance policies come with replacement cost coverage for your belongings and house structure. If you were to have a kitchen fire, and need to replace your cabinets, you’d receive brand new cabinets of similar quality whether they were a decade old or new when damaged.
Auto Insurance & Replacement Cost
While many car insurance policies only cover for actual cash value, certain situations call for replacement cost coverage. If you buy a new car, for example, your insurer might offer a depreciation waiver that takes decrease in value out of the equation.
Say an accident lands your 2-year-old Ford Escape in the shop. After an estimate, the car is determined a total loss and not worth repairing. If you had a depreciation waiver on your auto insurance plan, you’d get a brand new Ford Escape even though the original was 2 years old at the time of the loss.
Replacement Cost vs. Actual Cash Value
It’s important to consider your financial position if you were to lose or damage an item you love, car you drive, or room you use. Replacement cost gives you peace of mind, but is usually a little more expensive than actual cash value. Actual cash value can make sense depending on the value of the item you’re insuring.
It’s a good idea to keep a general inventory of your personal belongings, updated a few times a year with an estimate on what it would cost to replace them. You can use this to help make coverage decisions along the way. If you have any questions about what kind of coverage you have, or what might be available, contact your broker!