The Difference Between Insuring Actual Cash Value vs. Replacement Cost

Actual Cash Value vs. Replacement Cost / Wednesday, September 30th, 2020

Most people do not think seriously about disasters until they actually strike. A better time to think realistically about what might occur is when first deciding how to ensure the contents of your home or business. When doing so, it is important to understand the difference between insuring actual cash value vs. replacement cost.

Actual Cash Value

The actual cash value of a possession is defined as its depreciated value. For example, television might have set you back $300 when you first purchased it in 1980, but its actual value today may only be $10. So if your insurance policy guarantees replacement of the actual cash value of your items, do not expect large sums.

Replacement Cost

The replacement cost of an item is the amount you would have to spend to buy a similar, new item. For example, purchasing a new television today might cost $400, so that is the amount of money you could expect to receive. Therefore, a policy that guarantees reimbursement of replacement costs is usually better than one that offers actual cash value.

Be sure to read all the exclusions and special limits of your policy, and to direct any questions to your insurance agent. Remember, the time to make changes to your coverage is before something unexpected happens.