What is replacement cost and actual cash value?
When your property is damaged or destroyed, there are two ways in which the insurance company can pay you for your loss. Actual cash value (ACV) is taking the fair market value of your property, which takes depreciation into consideration. Replacement cost, on the other hand, is the cost to replace the property with something of like kind and quality without any depreciation.
Home insurance policies that reimburse you on an actual cash value basis will cost less than a comparable replacement cost policy. Because most property will immediately lose value from the time you buy it, the actual cash value policy will inevitably pay less than the cost to fully replace the property. For example, if you buy a television for $1,000 and then need it replaced for whatever reason, your insurance company will only give you what that exact same television is worth at the time of your claim. This means that while your television cost $1,000 at the time of purchase, it may now only cost $600, so you will only receive $600 for it from your insurance company.
In contrast, replacement cost policiesoffer more insurance protection because they reimburse you the exact price to replace your depreciated property with a new version. This means that if you bought your television for $1,000, you will likely receive $1,000 from your insurance company for a new one, or at least an amount of money that will allow you to buy a very similar television to replace the old one.
Both methods begin with the current value of your property, and actual cash value will reduce its value with depreciation, while replacement cost will not. It’s important to know how your home insurance policy will reimburse you in the event of a loss and to make sure you are purchasing the right amount of insurance.