Skip to main content

Insurance Explained – Replacement Cost vs. Actual Cash Value

By March 9, 2022Insurance

I am sure it will come as no surprise to you that insurance can be a tricky subject to navigate for millions of people across the country. You may have even stumbled across this blog with the singular purpose of conquering this very obstacle. The good news is that you came to the right place. Today we are going to help educate you on a common question that makes its way to insurance agencies everywhere. Today we will help you with Insurance Terms Explained – Replacement Cost vs. Actual Cash Value.

Replacement Cost and Actual Cash Value are different.

In the world of insurance Replacement Cost is defined as the amount of money it would cost to either rebuild or replace an item (such as a home, business, or other asset) at its current value. Think of this as the price paid for an item.

Let’s use an example to help simplify this further.

You purchase a high-end sound system for your entertainment room for $3,000. You are proud to own it and enjoy it considerably, so you decide to ensure it with Replacement Cost Coverage on your home insurance. 4 years later you have an unfortunate event where your home is burglarized while you are away at work. Your high-end sound system was taken.

You have Replacement Cost Coverage for this item! How does that work though?

First, you would want to file a claim with your home insurance. Typically they will remove the age (4 years in this example) from the value of the sound system and send you an initial payment. In the insurance world, the sound system age is what is known as depreciation. You could then go out and buy a new sound system at the same price of your old sound system, send your receipt to your insurance contact, and wait for them to send you a check for the difference paid out to you.

So, what is Actual Cash Value then?

That is a great question, and we are here to help. Actual Cash Value is the value of an asset after depreciation.

In the example listed above, (you) the insurance holder with Replacement Cost Coverage would, after filing the necessary claim with your home insurance, receive up to the original price of their sound system after presenting a receipt for a replacement sound system to your insurance contact.

With Actual Cash Value Coverage the insurance holder would still be paid out for the stolen sound system after filing the necessary claim with your home insurance. This time it would subtract the value of depreciation on that particular sound system.

Actual Cash Value takes depreciation out of the original price.

Depreciation of items will vary depending on what the item is. It is calculated by establishing an expected life of the asset being insured. Think of how a car loses value with time and milage, or how a cellphone loses value with time. It is similar in nature.

Still have questions about Replacement Cost and Actual Cash Value?

At Konen Insurance, we are happy to work with you to find, and more importantly, understand the best options that work for your needs. We are proud to work with insurance companies big and small. Contact us and we can help you find out what service best fits your insurance needs.

Insurance Explained - Replacement Cost vs. Actual Cash Value - Konen Insurance

Skip to content