- September 21, 2016
- Posted by: Liam Dai
- Category: Uncategorized
Replacement Cost vs. Actual Cash Value
One of the most important concepts that those who have homeowner’s insurance often overlook is what the value of their possessions actually are worth. There’s a distinction between types of value that the insurance industry recognizes—actual cash value and replacement cost. Let’s take a look at the difference before a catastrophe strikes so you know how much coverage you really have.
What’s the Difference?
Actual cash value (ACV) is the cost to replace your belongings and/or repair your home after depreciation has been factored in.
ACV uses the following factors to determine an item’s value with regards to depreciation.:
- Normal usage
A layman’s way of thinking of ACV is “as is” price at the time of the loss.
On the other hand, replacement cost is the actual cost to repair your property or replace it entirely with items of similar quality and type at the current market value.
Why Value Matters
The best way of illustrating ACV vs. replacement cost is with an example:
Suppose you purchased a sofa ten years ago that originally cost $5,000. While entertaining a bunch of friends, a guest leaves a cigarette unattended, only for the entire sofa to be burned beyond recognition. Luckily, you’re insured. How does the insurance company tabulate your loss?
The formula the insurer uses is:
Original price – ACV = Reimbursement
For our sofa example, that original $5,000 is probably closer to $200. Why? A similar sofa can be easily had at a garage sale, Ebay, or thrift store.
However, if you are insured for replacement cost, the sofa would either be replaced with the same exact item or a similar item.
As you can see, having replacement cost as part of your homeowners insurance is clearly superior to ACV coverage. While replacement cost coverage does cost more than ACV coverage, replacement cost is usually no more than a few extra cents per day. While our example featured a sofa from ten years ago, imagine how you’d be affected if your newer items were to kick the bucket?
As an informed and savvy consumer, be aware of exactly what type of coverage that you have. Many low-cost insurers tend to have ACV and named perils on personal property, so it is in your best interest to know just how much you’re covered for.
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Anyone who signs up for insurance knows that they want the maximum reimbursement for their possessions. However, it can be difficult to determine just what the value of your possessions is and how covered you actually are. That’s why we recommend contacting our expert advisors at RiskBlock to protect you and your family from catastrophe.