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. Rather the Actual Cash value provides the amount as if it was sold at a garage. Replacement cost provides 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 case of Replacement cost, you will be reimbursed 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 claims 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 it is important for these insurance holders 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 actually lost. The second payment will only be received when you replace the products within a reasonable time
- Pros of Actual cash value is that it charges a lower premium while for replacement cost 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
- Actual cost value gives a lower price while replacement cost gives 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. Actual 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 that is similar in terms of quality to the one lost. The main point is that there will be no deduction for depreciation|
|Example||If your five-year-old machine is damaged. Then the insurance company will value the current amount of machine in its same used condition and provide with 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 also find it 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 it is important for these insurance holders 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 actually 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 main 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 comparison table. You may also have a look at the following articles –