Difference between Actual Cash Value and Replacement Cost

(Nobody cares until there's a claim)

acv vs replacement cost

Like most people, your final decision on which home or car insurance to get may have been based on the premium. Don’t get us wrong, that plan may work great for a long time. At least up until most of your shingles blow off the roof during a storm. Or until your car crashes into a deer and can't be driven. Now you have a claim and need to know what benefits you’ve actually been paying for all this time. 

This is when the difference between “Actual Cash Value" (ACV) and “Replacement Cost” can be huge. In fact, depending on which plan you bought, you may no longer think saving a few dollars monthly was worth it. 

So now that you pulled the policy booklet from its file folder, you are determined to figure out the difference between Actual Cash Value coverage versus Replacement Cost coverage. You want to know what you have and what it will do for you. 

We can help make things clearer by dropping some serious knowledge about ACV and Replacement Cost. 

What Is Actual Cash Value (ACV)? 

In basic terms, Actual Cash Value (ACV) is the value of your used (possibly old or outdated) item if you tried to sell it in today’s market. 

You may be wondering how is Actual Cash Value calculated by insurance companies. Like everything insurance carriers do, there’s a math formula involved. It looks something like this: 

(Replacement Cost) - (Depreciation) = ACV

In real life this is how it looks:

Maybe in 2009 you bought a brand new Vespa electric scooter for $5,449. Yesterday you found that same Vespa scooter for sale on Facebook Marketplace for $2,990. The sale price you found online for your kicky little Vespa is the Actual Cash Value. In this example, if your insurance policy is based on ACV, then you won’t get enough to buy a brand new version (which is now listed new at $7,000) but instead the $2,990 Marketplace price. 

How to Calculate Actual Cash Value

How to Calculate Actual Cash Value

What Is Replacement Cost? 

Most people assume they are automatically being insured for the replacement cost. You probably do too. That’s because Replacement Cost is when the insurance company reimburses the full amount for brand-new replacements of wrecked or stolen items. Well, the full amount minus your deductible. 

Let’s say your $2,000 leather sofa is destroyed when a water pipe bursts in your living room. Buying that same sofa today will cost you $2,500. If you have a replacement cost policy (with a $200 deductible), then you’ll be glad to receive that $2,300 claims check. (Bad news if you got the ACV policy instead because you’re only going to get the garage sale price. Yikes!) 

What Is Replacement Cost? 

It’s easy to see why car replacement insurance is worth it. Picture you purchase a new car worth $17,000 and insure it with full replacement cost insurance. Your deductible is $1,000. Four years later, the car is now worth $12,000. 

Here’s how the insurance company figures out what to pay you:

(Current Market Value of $12,000) - (Deductible of $1,000) = $11,000 claims check

If you don’t want the downgraded ACV for your home, car, electronics, or any valuables like jewelry, then your best bet is replacement cost policies. Of course, there’s a trade-off. You’re going to pay more premium for the richer benefits. 

A knowledgeable, independent insurance agent can help you figure out the best plan for your needs. 

Replacement Cost Means You Have to Replace It

Keep in mind, when you have a Replacement Cost insurance policy then you’re expected to do some replacing. You can’t just deposit that $2,300 claim check for your leather sofa and then go to Ikea for a $400 sectional. What’s the harm in making a little scratch from your broken water pipe? Um, that’s just not how Replacement Cost plans work. You have obligations in this deal too. 

There is a two step process to Replacement Cost claims: 

  • Step 1 - You’ll get a claim check from the insurer for your property’s Actual Cash Value amount
  • Step 2 - Submit proof that you really did replace the item. Then you’ll usually get the final claims payment. This last reimbursement will bring your payout to the total Replacement Cost amount. 

Okay, you might have gotten one of those high-value home policies which will payout Replacement Cost right away without proof of replacement. These plans are somewhat uncommon and do come with a much higher price tag than the average Replacement policy. 

Remember, your independent insurance agent can help you navigate the claims process so you don’t miss out on any of your benefits. There are important things to keep up on like staying in contact with the claims adjuster, submitting the proper types of documentation, and doing everything on time. 

You Get What You Pay For 

Paying for different types of property insurances may feel like a burden sometimes. Except when damages or losses happen. In that situation, most people expect to be made whole by their insurance policies. That’s doable as long as you have the right coverage in place for your needs and you understand what it can (and can’t) do for you. Don’t be that person expecting a large payout and instead get chump change. 

Experienced, independent insurance agents are available to answer any questions you may have about your home, condo, and auto insurance coverage. Talk to an agent in your area today.

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