The Difference Between Replacement Cost Coverage vs. Actual Cash Value
What is the difference between Replacement Cost Coverage and Actual Cash Value?
What is the difference between Replacement Cost Coverage and Actual Cash Value?
Replacement Cost and Actual Cash Value are Homeowners Insurance or Renters Insurance's two most significant coverages.
These coverages are designed to reimburse you for losses or damages to your insured commercial or residential property caused by covered perils such as vandalism, theft, hail, water damages, fire and smoke, and falling objects. Here, we will discuss the difference between replacement cost coverage and Actual Cash Value.
If you have Replacement Cost Coverage, the depreciation of the property will not be considered when you are reimbursed for the repair, replacement, or rebuild cost of your damaged property or any assets within it.
In this coverage, your insurer will reimburse you for the full cost of restoring your damaged property or buying a new item of the same kind and quality as the ones that were lost. There'll be no deduction for depreciation whatsoever.
Suppose that your color TV is stolen in a theft attempt at your insured property, and you have filed a claim with your insurer to get reimbursed for the cost of buying a new TV. Your insurance company will pay you exactly the amount you need to buy a new color TV with features as similar as possible to the stolen model.
The premiums of Replacement Cost Coverage are higher than Actual Cash Value coverage.
Actual Cash Value coverage reimburses you for the cost to repair, rebuild, or replace your insured property or assets within it after deducting the depreciation in its value.
In simple words, Actual Cash Value reimburses you based on the current estimated value and the cost of the damaged property or asset within it.
To make it easier to understand, suppose you purchased a new sofa for $1000 three years ago, and it was recently ruined in a house fire.
Now, you file a claim with your insurer to get reimbursed for the replacement cost of the sofa.
If you have an actual cash value policy, it's unlikely that you'll receive the full cost you paid ($1000) for the sofa when you purchased it. Your insurance company will only pay you the current estimated sofa cost by deducting the value depreciation and any deductibles (if applicable).
So, you won't receive the purchase cost for your damaged or lost asset within your insured property with Actual Cash Value coverage. You will receive the current cost of the property or asset at the time when the damage occurred.
However, that's probably why the premiums of Actual Cash Value coverage are lower than Replacement Cost Coverage.
| Features of Insurance Coverage | Replacement Cost | Actual Cash Value |
|---|---|---|
| Factor in Current Value | No | Yes |
| Premium Rates | High | Low |
| Deductible | High | Low |
| When to Choose | Suitable for Expensive and Valuable Items | Suitable for Low-Cost Items |