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Insurance Coverage: Replacement Cost vs. Actual Cash Value

for Bradenton, Sarasota, Lakewood Ranch and Beyond
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May 19, 2015

Differences

Replacement Cost (RC) is the replacement of something old with something new (new for old). For example, if you purchased an appliance five years ago for $6,000, and it cost the same to replace it today, the insurance company would pay a total loss claim at the full $6,000.

Actual Cash Value (ACV) is the replacement of something old minus depreciation. Depreciation is most commonly calculated using the object’s life expectancy. For example, if the appliance mentioned above had a lifespan of ten years, then for insurance purposes it would be assumed that after ten years its value would be $0. If there was a total loss after five years, the insurance company would pay the claim with an ACV of $3,000 (not the RC value of $6,000).

Why it’s important

Homeowner’s insurance usually provides RC coverage, while personal property insurance usually means ACV coverage. This is important to know and understand before you purchase a policy because adding replacement cost coverage is usually an option. When comparing two different proposals you should always make note of whether the policy is for RC or ACV because the difference can be dramatic—i.e. it’s not unusual for a $5,000 electronic device to carry a $700 ACV only three years after purchase.

Although ACV can result in lower premiums, it doesn’t mean it’s the right fit for you, especially when hard to replace/valuable possessions are involved. Give Bradenton Insurance a call so we can talk through your options and find the best combination of companies and coverage.

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