Replacement Cost vs. Actual Cash Value

Let’s say your home was broken into last night. Though no one was hurt, your big screen TV was stolen. Luckily, you have homeowner’s insurance. When you go to make a claim, insurance companies have several methods to calculate the amount it will pay you for that loss. Two of these methods are replacement cost (RC) and actual cash value (ACV).What exactly are RC and ACV?•    RC is what you would pay for the item at today’s cost.•    ACV is what you would pay for a similar item at today’s cost minus depreciations (so, really, replacement cost minus depreciation or the decrease in value due to wear and tear or age)If you are like most insurance customers, you probably believe that RC of damaged or stolen property is usually the most favorable figure due to it compensating for the actual cost of replacing property. However, the downside to this option is that monthly premiums will typically be higher than ACV insurance.The benefit of choosing ACV insurance is that monthly premiums will be lower, reflecting the fact that you will receive only the depreciated value of your possessions in the event of loss or damage. You might not receive enough claim money to replace the items you had filed.Now back to that stolen TV. Say you purchased it for $2,000 five years ago. The insurance company will probably say that all TVs have a useful life of 10 years. A similar television today costs $2,500 (this is the RC). Your stolen TV had 50 percent (five years) of its life remaining. So, the ACV equals $2,500 (replacement cost) times 50 percent (useful life remaining). The amount you will receive is around $1,250. Get it?In preparation of a situation like this break-in scenario, it is vital to have a proper inventory of your property. This is easily done by going room to room with a video or still camera and documenting everything. Also, save receipts for large purchase to evidence when an item was purchased and what was paid for it. That way, it will be easier for the insurance company to file your claim.To figure out whether you should pay for RC or ACV, contact our insurance consultants today. Just call 404-459-5975.