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Replacement Cost vs Actual Cash Value

tony • November 29, 2018

Replacement Cost and Actual Cash Value.

These are the two ways that insurance companies use to determine how much to pay you when you file a claim.  The Actual Cash Value loss settlement will factor in depreciation of the damaged items when determining how much the insurance company should pay if your claim is covered by your insurance policy.  In this scenario you’d get a check for what the damaged items are worth at the time of your claim event.  This means that you’ll have higher out of pocket costs to get things back in order.  On the plus side, however, your insurance premium will generally be lower on an actual cash value policy when compared to a replacement cost policy.

The second loss settlement option is replacement cost.  This type of loss settlement does not factor in depreciation but instead determines how much will it cost you to purchase new items to replace the damaged items.  This is obviously the preferred loss settlement when you have a claim, but your insurance premium will generally be higher when you choose this type of loss settlement.

Want an example?

Let’s say that your house gets struck by lightning and as a result all of the electrical components of your house are fried.  TV’s, DVD players, microwaves, etc.  Let’s assume that it’s going to cost you $10,000 to replace all the damaged items.  Let’s also assume you have the standard $1000 deductible.  If you have a replacement cost policy, you’d likely receive a check for $9000.  Which is $10,000 less your deductible.

If you have an actual cash value policy, the insurance company would have to determine how old the damaged items were at the time of the lightning strike.  They would then depreciate accordingly, and you may only receive a check for maybe $2000-$3000.  Which would be $10,000 less depreciation less your deductible.

One final word of caution…. 

There are many insurance agents out there, unfortunately, who try to entice you with a lower price and they do so by changing the personal property and/or roof from replacement cost to actual cash value without telling you.  While the price looks great, you may be faced with thousands of out of pocket costs if you if you unknowingly choose this type of policy.  When getting quotes, be certain to ask if the dwelling, personal property and the roof have replacement cost settlement before signing on the dotted line.

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