Actual Cash Value vs. Replacement Cost

When purchasing an insurance policy, you are often given the choice of insuring your property at actual cash value (ACV) or replacement cost (RC).  This decision determines the amount of your check at the time of a loss.

Replacement Cost is the amount it would cost to replace your item with the exact same item or a similar one, after a loss. This allows you to buy the item again at the time of the claim, as new. Actual Cash Value is what you would pay for a similar item at today’s cost (replacement cost) minus depreciation.

Let’s put this in a real life situation (EXAMPLE ONLY): You paid $1,000 for a sofa last year. Today, the same sofa is worth less because it’s a year old and is now used. A claims adjuster will determine just how much it has depreciated. For this example let’s say the adjuster depreciated the couch by $200.  With ACV, you would receive $800 ($1,000 – $200 depreciation = $800 actual cash value).  With replacement cost, you would receive a $1000 because the depreciation is removed from the equation. You paid a $1000 for it, so the insurance company will give you $1000.

The difference between ACV and Replacement Cost can be substantial at the time of a loss. Be sure to discuss your options with your agent, to help you make this important decision.