Replacement Cost vs. Actual Cash Value

By Anna Demetree

When an incident happens, and you’re relying on insurance to cover your losses, how will you know how much you’ll be paid for your claim? Insurance companies use several methods to determine the coverage amount, including replacement cost and actual cash value. The most important step is to see what the options are, talk through it with your agent, and know exactly what your coverage includes.

“When disaster strikes, the client’s “stuff” is often the last thing on their minds. At least until the clouds pass, and it’s time to pick up the pieces. Protecting your hard-earned possessions with insurance is always a smart move. Replacement cost insurance does not factor in depreciation. It pays to replace your property at full cost, minus your deductible. This means that you can replace your property with that of similar kind and quality to that which you lost. Replacement cost may also be available on your structures, which would offer more protection since the cost of building a home often exceeds its market value”, stated customer service representative Abby Thorson.  

Here is a bit more explanation of the differences:

Replacement Cost

This method compensates you for the actual cost of replacement for damaged or stolen property. The amount you receive is equal to what is required to replace the property. This method is favorable amongst customers’ point of view because you get full compensation for your losses. Depending on how large or expensive your loss is, this method requires you to provide a lot of information about the damaged or stolen property for you to receive full reimbursement for your claim. This may be timely since the insurance company has to review your losses and determine your reimbursement thoroughly. The more information you provide about your item, the more probable it will be to get fully reimbursed. You should make a list for each of your items that includes:

  • The original receipt, if you still have it
  • The price you paid for the item
  • The date of when you bought the item
  • A description of the item and the condition it’s in
  • Any pictures of the item if applicable
  • The replacement value of the item today

Actual Cash Value

This is the standard method insurance companies prefer when reimbursing for losses. Also called the market value, the actual cash value is equal to the total replacement cost minus any depreciation of the property (ACV= replacement cost – depreciation). This method would compensate you for the value or dollar amount of the item if you were to sell it today in the marketplace. Depending on the size of damaged or stolen property, this method can leave you at a loss. You will have to spend your own money to cover the rest of the cost of new items. If you only receive actual cash value for costly items, such as your home or car, you could potentially be spending a large amount of your own money.

So, What’s the Difference?

Essentially, replacement cost and actual cash value are the same, except for depreciation or deduction. However, both methods determine what the item or property is worth today. Replacement cost can potentially provide you full compensation, whereas actual cash value can leave you with losses. Your coverage can be determined by the insurance policy you have. Different policies contain different coverages depending on the risks covered.

Make sure your policy is up to date and contains the amount of coverage you’re looking for. Here are a few points to think about when making an informed decision about your coverage and discussing your insurance plan:

  • How much will it cost to replace my belongings if they are damaged or stolen?
  • Is the insurance company known for paying claims fairly and promptly?
  • What’s the process for filing and settling a claim? (ask who to call and what happens after you file a claim)
  • What discounts are available?

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