Much of the terminology used when discussing insurance coverage may seem unclear to the average consumer. Recognizing the significance of the concepts behind these unfamiliar words is key to getting the value you need from your policy.
Defining the difference between Actual Cash Value and Replacement Cost can be a common area of confusion. More importantly, so can understanding how they factor into the outcome of an insurance claim.
Replacement Cost
Replacement cost is equivalent to the dollars it would take to purchase a new and unused version of the same model or type of item as what was lost or damaged. For example, if your laptop was stolen and your insurance covered its replacement cost, you’d be issued payment in the full amount you’d need to buy the same model laptop brand new. If that laptop costs $500 to buy off the shelf, you’d receive $500 from your insurance policy in this scenario.
Actual Cash Value
In contrast, Actual Cash Value, also referred to as Fair Market Value, reflects the replacement cost of an item minus depreciation. It can also be thought of as what a typical buyer would be willing to pay for an item in its current condition. If that laptop cost $500 brand new but you’ve owned it for two years with daily use, an insurance policy issuing a claim based on Actual Cash Value would give you what it’s determined to be worth with age and use taken into consideration. Your payout would more likely be $200-$300 instead of the $500 you’d need to get the same laptop new.
Why Do They Matter?
Knowing whether your insurance coverage pays out Replacement Cost or Actual Cash Value is important for understanding if your policy provides you with adequate protection. What if you’re self-employed and rely on your laptop to run your business? You’d have no choice but to get a new one if yours was stolen. Would it be feasible for you to do that if insurance only reimburses you for half of the funds you’d need to make the purchase? If not, you’d want to be certain your applicable policy covers Replacement Cost and not Actual Cash Value.
What if we’re talking about your home? Losing a home and all its contents to a natural disaster would undoubtedly be a hardship for anyone. But how much would that hardship be compounded if your insurance coverage only afforded you a payout that was substantially less than what it would cost to rebuild your home and replace your belongings? In the wake of being uprooted and seeing the home you worked so hard to own destroyed, will you want to be worrying about the impact of your claim only yielding Actual Cash Value?
We Can Help You Sort it Out!
That’s why it’s so beneficial to have the support of knowledgeable and experienced agents like those at the O’Brien Insurance Agency. We’re here to help our clients in the greater Glens Falls region navigate all aspects of obtaining the best fit coverage for their unique needs.
We can review your existing policies to make sure you understand the coverage you have in place. We can also help to determine if that coverage would meet your needs in a worst-case situation. And if the answer to that question is no, we’ll work with you to find new policies so you can feel secure knowing you’re covered if the unexpected happens.
