Sometimes insurance jargon can be downright confusing. Certain terms look synonymous, but relate to totally different things. This often causes problems with filling out insurance claims or making a claim over the phone. One term that is often confusing is “actual cash value.” It is frequently mixed up with “replacement cost value,” which is a completely different thing. This post will explain the difference between the two and how they are calculated.
Why Replacement Cost Vale (RCV) is not Actual Cash Value?
Replacement cost value is the amount that an insurance company would have to pay you to replace an insured asset. The amount offered would be how much the item is worth at the time of making the insurance claim. This will not be the market value of the item, but how much the item was worth in its pre-loss condition. Some insurance companies use this method of calculation to prevent over-insurance and insurance fraud. The replacement value cost helps you (the policyholder) not have to spend extra money to replace your item. RCV policies are a little more pricey than an actual cash value policy.
RCV calculation – If your computer is covered by an RCV policy, your insurance company determines the cost of a similar computer that can be purchased that day. This helps them to determine the compensation amount.
What is Actual Cash Value?
Unlike a replacement cost value policy, an actual cash value policy does not compensate you for depreciation of the item that you’re claiming.
The actual cash value is calculated by subtracting the depreciation of the item from the replacement cost. Insurance companies normally calculate depreciation by determining what percentage of useful life remains for your insured item. That percentage is then multiplied by the replacement cost value. This gives you an actual cash value.
ACV calculation – If you purchase a $2000 entertainment system in 2007 (five years ago) and it’s been damaged in 2012, your insurance company will calculate the useful life remaining for your entertainment system. If the overall useful life of an entertainment system is 10 years, they will subtract 5. They then find that a similar unit costs $2500. Since your entertainment unit only had five years left of its life, and the replacement cost is $2500, they will multiply 50% by $2500 and come up with the actual cash value, which is $1250.
It is very important to remember that book value or the actual value of your item is not the actual cash value or the replacement cost value. If you currently have a replacement cost of value policy and you want to change over to an actual cash value policy, visit the website of Loftis & Wetzel or give us a call at 855-360-0466 for a free Stillwater OK home or auto insurance quote.