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What Is Actual Cash Value Vs Replacement Cost?
Actual cash value and replacement cost both are the methods of valuation of the insured property at the time of the loss or theft, or destruction, wherein the former is the actual value that could be earned on the sale of the property, the latter is the amount of money that could be obtained by replacing the existing asset at the current market price with an equivalent asset in a similar condition and kind.
The 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 that is 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.
Actual Cash Value Vs Replacement Cost Explained
The actual value vs replacement cost are very commonly used financial terms or metrics in the insurance field to determine the amount of claim to be given to cover losses in the insurance policies.
The actual cash value of an insured asset denotes the value it had when it suffered the loss or damage. It accounts for the original cost after deducting the depreciation cost. The cost of replacement provides the calculation of the fund needed to replace the lost or damaged property or asset with another one that is similar or the same in quality and other features.
Replacement cost insurance provides the full amount for any lost, stolen, or damaged belongings. The insurance company will pay the entire amount of the claim if proven. Opting for replacement cost insurance for expensive items out of pocket is appropriate.
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 policyholder never suffers any loss or damage to thebelongings. The actual cash value can also be considered if one can replace the product from in-pocket expenses. This is true if they live in low crime areas and are not concerned about the weather condition.
However, it is to be noted that in the case of both costs, the insurance policy amount or claim may be different and will depend on the terms of the policy. Some policies agree to give the actual value as the coverage amount and in case of some others, they provide the option to buy some additional coverage amount as replacement cost.
Example
The actual value of the property or asset,at the time of calculation of the insurance amount, is obtained by subtracting the depreciation value from the replacement cost of the property. At the same time the cost of replacing the asset is calculated on the day of replacing it. However, let us understand the concept with the help of a suitable example.
Assume the following example – Jack purchased a machine 20 years ago for $500 and realized that the machine cannot be used further. So, how much will Jack be reimbursed? Replacement costs will allow him to purchase a new machine for $500. In the Replacement cost, he will be refunded the entire value of a new machine like the quality it was before. For Actual Cash Value, Jack will be reimbursed for the value of a 20-year-old machine in the same condition that 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 them completely before deciding which one to opt for and which works best to protect the property and stay within the budget.
Infographics
Let’s see the top differences between actual cash value vs. replacement cost.
Key Differences
Let us look at the key differences between the two topics from the points mentioned below.
- 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 these insurance holders need to keep receipts for all the expensive goods. And in the 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 it is time to replace the products within a reasonable time.
- The pros of Actual cash value are that it charges a lower premium while for replacement cost, this policy will allow the policyholder to replace the lost products.
- Con of Actual cash value is when they decide to replace the damaged or stolen item with a new item, one may find it hard to find and also find it unsatisfactory, while replacement cost is that the premium is higher than the actual cash value.
- The actual cost value is lower, while the replacement cost provides more coverage.
 Comparative Table
| Basis | Actual Cash Value | Replacement Cost |
|---|---|---|
| Meaning | The 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, returning it 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 the device in its same 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 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, 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 |
The above mentioned comparative table helps us to understand the difference between them at a glance and to remember the details easily.
