What is the difference between “Actual Cash Value” and “Replacement Cost?" - Temecula Insurance Agency - Carver for Auto, Home, Life & Health

What is the difference between “Actual Cash Value” and “Replacement Cost?”

What is the difference between “Actual Cash Value” and “Replacement Cost?” Introduction It is important to know how “Actual Cash Value” versus “Replacement Cost” can affect the coverage of your personal items. Consider if you had a 70 inch Smart TV, and someone stole it. Would your insurance company give you a settlement to replace your TV with a new one or would the insurance company give you what your TV is worth at the time? In 2018 a national study conducted by Mercury Insurance reported that almost one in five policyholders believe that they didn’t have enough insurance to repair or replace damaged or stolen property. In this post we will define the difference between “Actual Cash Value” (ACV) versus “Replacement Cost” and how it can benefit your personal items. What is Actual Cash Value (ACV)? It is when a Homeowner has an actual cash value coverage to repair or replace damaged, stolen or destroyed personal property, their insurance company will pay to replace the item with quality less age and condition depreciation. It relates to the value of an insured item for the purpose of paying a claim. Depreciation rates vary depending on the type, age, and condition of property. This settlement does not allow you to replace what you’ve lost. It compensates you for the value of the item being sold at a garage sale. Why is Actual Cash Value Important? Actual Cash Value is important because it calculates the replacement cost of an item, minus depreciation. Consider three questions when purchasing ACV: How accurately can you document and show the lost value of your property? What type of Policy do you have? Will the Insurer pay “actual cash value” or “replacement cost?” How to Calculate Actual Cash Value (ACV) For example, we can calculate ACV: Replacement Cost X Percentage of Useful Life Remaining Say a fire destroyed your surround sound stereo system, and you wanted to file a claim for it. If the cost of the stereo system was originally $1,500 and the useful life of the stereo system was six years, but the system was three years old-ie it has 60% of its useful life remaining, the equation would look like this: $1,500 x 0.6= $900 Practices for determining ACV will vary by the insurance carrier and location. What is Replacement Cost? Replacement Cost provides you with a payment equal to that which would be required to replace the lost items. It’s superior to ACV because it provides you with the money to replace your items. However, many policy owners are confused on how the Replacement Cost will be paid. Replace the items first before you’re able to collect a full settlement. Why is Replacement Cost Important? Replacement Cost is important because; for example, a PS4 valued at $1,000 is damaged in a windstorm; the life of the PS4 is 10 years, so it values a five-year-old PS4 at $500. If the policyholder purchased “replacement cost value” they would entitle coverage to $1,000 to purchase a new PS4, compared to $500 under an “actual cash value” policy. It provides extra protection In closing, when deciding to choose between “Actual Cash Value” versus “Replacement Cost” consult with your trusted Insurance Agent to determine which option is best for you. Ultimately, the means of settling a claim is huge when determining the value you get out of your insurance policy whether it’s your car, home or anything else. Mercury Insurance Vice President of Property Claims Christopher O’ Rourke stated, “Depreciation rates vary depending on the type, age, and condition of property, but we do our best to make sure our customers are properly compensated so they can resume their regular lifestyle as quickly as possible.” For additional information or help with a new policy Contact Carver Insurance Services 40525 California Oaks Rd Suite E-6 Murrieta CA 92562 Phone: 951-677-9600 https://insuredbycarver.com/contact-us/

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