Actual Cash Value vs Replacement Cost

One of the reasons you talk with your local independent insurance agent is to get straight answers about the information in your insurance policy. Policies are written the way they are to specifically describe what is and isn’t covered. We have legal experts on staff here at Hastings Mutual for that reason. 

Two terms are pretty common throughout the insurance business, though, and it makes a difference which one applies to you. Which one describes your situation depends on the what’s written in the policy you own.

Replacement Cost

This is how much it would cost to replace whatever it is that you lost. For example, as an option on your Homeowners policy, you can choose to insure your personal property at its replacement cost. Say a lightning strike ruins your TV and you file a claim for it. If the loss is covered by your policy, you can replace the TV with a similar, brand new one — even if you had been watching the old TV for decades and it wasn’t performing as well as it used to.

Actual Cash Value

ACV is the replacement cost, minus the amount of depreciation, or the value it lost because it’s been used and/or is wearing out. If your Homeowners policy doesn’t have the replacement cost option, you have ACV on the policy. In that case, you can replace that lightning-damaged TV, but you may not get a brand-new device, since your old TV has decreased in value as it got older and is used pretty much every day.

As you might expect, coverage at ACV is often less expensive than at replacement cost — but make sure you get the coverage you need. If it’s available, you might save a little at first, but if tragedy strikes, you don’t want to pay more than you have to out of your own pockets. 

Every situation is different, and you can’t always choose whether you want replacement cost or ACV for your property. You should always talk to your agent about your specific needs; he or she can help you find the coverage that’s best for you.