Actual Cash Value vs. Replacement Cost Value

The “depreciation difference” homeowners and renters need to know about.

How do you decide which coverage is right for you?

Sometimes the best way to explain coverages is through an example. Here’s the example we’ll use: You purchased a new “smart” 65” television set for $700 (including any sales tax) three years ago. There was a theft at your house or apartment and your TV was stolen.

How much will your insurance company pay you for the stolen TV?  The answer: It depends on whether your homeowners or renters policy has Actual Cash Value coverage or Replacement Cost Value coverage.

What does this mean?

If your policy covers items at the Actual Cash Value method, you will be paid for the Actual Cash Value of the item. In other words, you will not receive the original $700 you paid for your TV. You will instead receive the value of it after you’ve used it for three years.

If your policy covers items at the Replacement Cost Value method, you will be paid the Actual Cash Value up front and if you choose to replace the TV you can let your claims representative know your intent within 180 days. The claims representative will request that you provide the receipt showing that the TV was replaced of similar make and model. An up-grade would be permissible; however, you would be reimbursed up to the replacement cost of a similar make and model TV.

What’s the difference?

The difference is depreciation – the amount of money that is deducted from the purchase price due to wear and tear over the course of time you used the item.

Here’s how it works:

Using the example above, the new purchase price of a similar “smart” 65” television is now $750 (including any sales tax).

Actual Cash Value

If you have an Actual Cash Value policy, you will receive the difference between $750 and the depreciation for the time you owned your TV. Resources are made available to insurance companies suggesting that a TV would have a useful life expectancy of 20 years. Therefore, each year a 5% depreciation would apply to your TV.

3 years x 5% per year = 15% depreciation.
$750 x 15% = $112.50 deprecation.
$750 – $112.50 = $637.50. Actual Cash Value at time of loss.
Amount of payment from insurance company: $637.50 less any deductible application.

Replacement Cost Value

If you have Replacement Cost Value coverage, you will receive the amount it would cost you to purchase the same (or nearly the same) TV in today’s marketplace upon proof of purchase. For this scenario, we’ll assume the same TV is still available on the market three years later at a price of $750 including any sales tax. You will receive a check for $637.50 up front and then upon proof of purchase a second check would be issued for $112.50. The total of both checks then equals the replacement cost of $750.

Amount of payment from insurance company: $750 including sales tax less any deductible application.