Actual Cash Value and Replacement Cost Differences
Actual cash value and replacement cost, both are the method of valuation of an insured property at the time of the loss or theft or destruction, wherein the former is the actual value that could be earned on sale of the property at the time of calculation the insurance amount which is obtained by subtracting the depreciation value from the replacement cost of the property while the latter is the amount of money that could be obtained on replacement of the existing asset at the current market price with an equivalent asset in similar condition and kind which is calculated on the day of replacing the asset.
Actual Cash value policy gives the depreciated amount of the property at the time of loss. This does not allow the policyholder to replace the value of what you have lost. Instead, the Actual Cash value provides the amount as if it was sold at a garage. The replacement cost offers a payment that will allow the policyholder to buy the same item. Replacement cost is considered a superior method since it puts the user in a similar position as it was before.
Assume the following example – You purchased a machine 20 years ago for $500. You realize that the machine cannot be used further. So, how much will you be reimbursed for? In the Replacement cost, you will be refunded with the entire value of a new machine like the quality it was before. Replacement cost will make you able to purchase a new machine for $500. For Actual Cash Value, you will be reimbursed for the value of a 20-year-old machine in the same condition as it stopped working. In this case, the policyholder may receive only around $50
Both these methods have some pros and cons; hence it is necessary to understand these methods completely before deciding which one to opt for and which one works best to protect your property and stay within the budget.
Actual Cash Value vs Replacement Cost Infographics
Let’s see the top differences between actual cash value vs replacement cost.
- The formula for Actual cash value = Replacement cost – Depreciation while Replacement cost is the amount at which the object is purchased.
- In the case of insurance claimsInsurance ClaimsAn insurance claim refers to the demand by the policyholder to the insurance provider for compensating losses incurred due to an event covered by the policy. The company either validates or denies the claim based on their assessment and nature of the incurred losses. for an actual value policy, the insurance company will review the list of items that have been lost or stolen and calculate a current value and provide an offer. Hence these insurance holders need to keep receipts for all the expensive goods. And in case of the Replacement policy, two payments will be received. The first and initial payment for the value is lost. The second payment will only be accepted when you replace the products within a reasonable time.
- The pros of Actual cash value are that it charges a lower premium while for replacement costReplacement CostReplacement Cost is the capital amount required to replace the current asset with a similar one at the present market rate. Usually, assets replacement occurs when their repair & maintenance charges surge beyond a reasonable level. , this policy will allow you to replace your lost products.
- Con of Actual cash value is that you decide to replace your damaged or stolen item with a new item, you may find it hard to find and also find it unsatisfactory while that of replacement cost is that the premium is higher than the actual cash value.
- The actual cost value gives a lower price while the replacement cost provides more coverage.
Actual Cash Value vs. Replacement Cost Comparative Table
|Basis||Actual Cash Value||Replacement Cost|
|Meaning||Actual Cash Value policy claims payment will be based on buying items of similar value as the ones lost. Real cash value factors in depreciation in the payment||Replacement cost insurance claims to cover the cost of restoring, getting it back to its original condition or buying an item similar in quality to the one lost. The main point is that there will be no deduction for depreciation.|
|Example||Suppose your five-year-old machine is damaged. Then the insurance company will value the current amount of device in its same used condition and provide that amount of payment.||If your five-year-old laptop is stolen, the claim amount you receive will allow you to buy a new laptop with features as close to the previous ones. The claim amount you receive will not be the same as you paid for purchasing the original laptop. As that model will be cheaper now|
|Pros||Calculating items at actual value will be charged a lower premium.||This policy will allow you to replace your lost products.|
|Cons||If you decide to replace your damaged or stolen item with a new item, you may find it hard to find and unsatisfactory.||Premiums for this policy are generally higher than the actual cash value policy.|
|Insurance Claims||In the case of an Actual Value policy, the insurance company will review the list of items that have been lost or stolen and calculate a current value and provide an offer. Hence these insurance holders need to keep receipts for all the expensive goods.||In the case of the Replacement policy, two payments will be received. The first and initial payment for the value lost. The second payment will only be received when you replace the products within a reasonable time.|
|Formula||Actual Cost Value = Current cost – Depreciation||Replacement Cost = Current cost|
|Pricing||It gives a lower price.||It gives more coverage|
Replacement cost insurance provides the full amount back for any of the belongings lost, stolen, or damaged. It is appropriate to opt for replacement cost insurance for expensive items that are out of pocket. If the claim is proved, then the insurance company will pay the entire amount
The primary and most valid reason for getting actual cash value insurance is that it is cheaper than replacement cost insurance. These savings can add up in the long term and provide more value if you never suffer any loss or damage to your belongings. The actual cash value can also be considered if you can replace the product from in pocket expenses. This is true if you live in low crime and not concerned about the weather condition.
This has been a guide to Actual Cash Value vs Replacement Cost. Here we discuss the top 7 differences between actual cash value and replacement cost along with infographics and a comparison table. You may also have a look at the following articles –