Actual cash value or replacement cost: What’s better for insurance?

CRASH! From the middle of nowhere, an inattentive driver t-bones you. Fortunately, you and the driver of the other car are not injured. But your 2007 auto is totaled. You only have 30,000 miles on the car.

After talking with the claims adjuster, you learn that you’ll only receive $11,000 for the total loss. “What?” you think to yourself. “It would cost at least $20,000 to buy that car new!” Yes, and $20 grand minus the $9,000 the auto depreciated is what insurance companies refer to as actual cash value (ACV).

The simplest definition for ACV is: Replacement cost minus depreciation.

Replacement cost is the amount of money it costs to replace a damaged item with a new item of like kind and quality.

Typically, a standard home insurance policy covers the replacement cost of a house. If a house is leveled during a natural catastrophe and the policyholder has adequate coverage, the policyholder likely would receive a claim check for the cost to rebuild (minus the deductible amount).

As for the contents in a home – computers, appliances, clothing, etc. – that may be a different story. Similar to the standard auto policy, most often personal belongings within a home are insured at ACV which, again, accounts for depreciation.

Some insurance carriers offer special coverage that gives a policyholder replacement cost for personal property so they can purchase all new items if they are destroyed in a loss. Other carriers allow a policyholder to purchase (usually with restrictions) special coverage that offsets auto depreciation for a certain number of years.

Ask your independent agent to review your coverages with you to see what your policy covers in the event of a loss.

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