FAQ: Replacement Cost vs. Actual Cash Value
By Sean Adair
Replacement Cost vs. Actual Cash Value – What does this mean?
Replacement Cost (RC) is the cost to replace damaged property with materials of like kind and quality.
Actual Cast Value (ACV) is the cost to replace damaged property with materials of like kind and quality minus depreciation.
What is depreciation?
Depreciation is the decrease in value of property over time. For example, the value of a ten-year old car of a certain make and model will be less than a brand new vehicle of the same make and model.
Why is the difference between Replacement Cost and Actual Cash Value important?
With property insurance, the difference between Replacement Cost and Actual Cash Value are important because these terms will determine how a claim will be paid out in the event of a loss.
Example # 1: A renter’s policy and a stolen couch
You purchased a renter’s insurance policy with a $500 deductible to protect the property you own inside your apartment. One day while you’re out, a thief breaks into your building and steals the couch you bought five years ago for $5,000.
You file a claim with your insurance company for your stolen couch. That same couch new is still $5,000 today. You purchased a policy replacement cost coverage. So the claims adjuster has a check sent to you for the replacement cost, minus the deductible: $4,500.
If you had purchased a policy with actual cash value coverage, the claim would have gone differently. For instance, your 5-year old couch is known to have a life expectancy of 10 years. So, at 5-years old, or 50% of the life expectancy, the actual cash value of the couch is 50% of the replacement cost, or $2,500. $2,500 minus your $500 deductible and the claim check for your stolen couch is $2,000.
Example # 2: A homeowner’s policy and a hail damaged roof
You purchase a homeowner’s insurance policy with a $2,000 deductible. You have a 10 year old roof on your home and the roof has a normal lifespan of 30 years. Unfortunately, a hailstorm damages your roof and needs to be completely replaced. A new roof for your home costs $30,000 today.
You file a claim with the insurance company and had purchased a replacement cost policy. When the claim adjuster pays out the claim for your new roof, you receive a check for $28,000, or $30,000 minus the deductible.
If you had purchased a policy with actual cash value, you would likely have received much less. If the roof is determined to have a 30 year lifespan, at 10 years old it has depreciated by 1/3rd. This means your claim could be paid out at 2/3rd the replacement cost minus the deductible, or $18,000.
What is the right coverage for you?
It’s important to know the difference between replacement cost and actual cash value when insuring your home, auto, and personal property. Not everyone’s needs are the same, so contact your insurance agent and they would be glad to get the right coverage for you and your family! Call our team at MAX Insurance Agency at 800-832-4689 or complete our Check Coverage form today. We’d be happy to help you get the right coverage for your unique needs.
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Sean started working at MAX in October of 2019. Outside the world of insurance, Sean enjoys spending time with his family and traveling whenever and wherever he can. While traveling, he gets to enjoy his favorite hobby, which is flying his drone and practicing amateur photography. He is a big fan of the Kansas City Royals, Chiefs, and the Kansas Jayhawks!