Actual cash value vs. replacement cost insurance

The loss of property can be traumatizing for all parties involved. However, insurance offers the opportunity for reimbursement for physical losses.

When replacing items, consumers have a choice between using "actual cash value" and "replacement cost" insurance. Actual cash value insurance pays you back the true cash value of the lost items, while replacement cost insurance will provide the amount necessary to replace the items with brand new ones at the time of the loss.

Actual cash value vs. replacement cost insurance

Replacement cost

Depending on the items you are insuring, this might be the better option for an insurance policy. This payment is based on the actual cost of replacing the item at its present value. Because the amount of the replacement item is figured by using an item that would be made out of a similar material and quality, this policy might cost a little more up front because the payout could be higher.

Replacement cost is a good option in cases where the value of the insured items is likely to appreciate. This is the case for jewelry and vintage cars, for example, as these items do not lose value as they age but become more valuable. In this case, you might want to secure a policy that will reflect that or else risk losing money in an insurance settlement if the unthinkable should happen.

Actual cash value

This option means you will be paid for what the item was worth at the time of the loss, factoring in any depreciation, or loss of value over time. A settlement based on the "actual cash value" may also factor in obsolescence. A camera, for instance, could loose value over time and not be worth as much as when it was purchased. Actual cash value also considers the present day costs for calculations, but the payment is invariably lower than the "replacement cost" model because of depreciation factored into the calculations.

They type of policy that's right for you depends on your needs, budget, the items you're insuring and their worth.

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