When shopping for insurance, it’s important to know the difference between replacement cost (RC) and actual cash value (ACV). These two coverage options have different ways of calculating the amount your insurance can pay you if you suffer an injury.
What is replacement cost?
Replacement cost is the amount it costs to replace, repair or rebuild damaged or stolen property without depreciation. In other words, it is what it would cost to replace, repair or rebuild at today̵7;s costs.
For example, if you have a fire in your kitchen and your stove is damaged, Replacement Cost reimburses you enough to buy a new stove of a similar model or quality.
Replacement cost provides more protection than actual cash value, but it usually comes at a higher premium cost.
What is fair cash value?
Actual cash value is the amount it costs to replace damaged or stolen property less depreciation. This means that it takes into account factors such as age and wear and tear when the property is replaced.
For example, if you have a fire in your kitchen, and your stove is damaged, Actual Cash Value reimburses you for the cost of your stove at a reduced amount due to its age and condition.
If you have actual cash value coverage, you’ll usually pay a lower premium than if you have replacement cost coverage.
Is replacement cost or actual cash value better to have?
Both RC and ACV are based on what it costs today to replace your damaged property with new property. The difference between the two is that ACV takes into account the depreciation.
In some situations, replacement cost is not always an option. For example, if the roof on your home was older, the actual cash value would apply in many cases. When you buy a car, the value starts to drop as soon as you drive it off the lot, which is why car insurance policies usually don’t offer vehicle replacement costs.
It is important to clearly understand the difference between RC and ACV to decide which one is better for you. A Bolder Insurance Advisor can help with this.