What Is Replacement Cost vs. Actual Cash Value?
When buying homeowners or property insurance, it is important to understand how your policy will value damaged property after a covered loss. Two common methods are replacement cost and actual cash value.
What Is Replacement Cost?
Replacement cost refers to the amount needed to repair or replace damaged property with new property of similar kind and quality, without taking out for depreciation. For example, if a computer is destroyed in a fire and a similar new computer costs $1,200, replacement cost coverage may help pay based on the cost of the new computer, subject to your deductible, policy limits, and other policy terms. Replacement cost coverage may apply to your home as well as personal belongings such as furniture, appliances, clothing, and electronics.
What Is Actual Cash Value?
Actual cash value, or ACV, takes depreciation into account. A simple way to find the actual cash value is:
Replacement Cost – Depreciation = Actual Cash Value
If that same computer costs $1,200 to replace but its depreciated value is only $500, an actual cash value settlement may be based closer to $500 rather than the full replacement cost. Depreciation may be based on factors such as the item’s age, condition, and expected useful life.
Replacement cost and actual cash value can make a big difference to an insurance claim. Replacement cost generally helps pay to replace damaged property with comparable new property, while actual cash value subtracts depreciation based on the property’s age and condition.
Understanding how your home and belongings are valued can help prevent unexpected expenses after a loss. Reviewing your policy with an independent insurance agent is important because coverage varies based on the company and policy.
You can experience the benefits of being a part of a full-service Independent Insurance Agency today! Simply contact Briggs Agency, Inc. if you are interested in an insurance review at 219-769-4840 or visit our website at www.BriggsAgency.com. We look forward to hearing from you!
Blog written by: Sara Trajanoska
