What is "Actual Cash Value"?
“Actual cash value” is one of those terms that can be easily overlooked when reviewing your insurance policy. However, should you ever need to file a claim, understanding this term will become extremely important.
“Actual cash value” is one of those terms that can be easily overlooked when reviewing your insurance policy. However, should you ever need to file a claim, understanding this term and how it applies to your possessions will become extremely important.
Actual cash value is what an item would cost to replace in new condition (replacement cost) minus the cost of wear and tear (depreciation). In other words, replacement cost is likely what you paid for the item brand new and actual cash value is how much the item is worth today, in an undamaged state. The confusion between these two terms is why many policyholders overestimate how much their insurance company will reimburse them after a loss.
Imagine you purchased a brand new car in 2013 for $20,000. Three years and 45,000 miles later, you’re involved in a motor vehicle accident that results in your car being labeled a “total loss”. Many policyholders make the mistake of assuming that they would be provided with cost of the car when it was brand new (in this case, $20,000). However, your insurance company would actually reimburse you for the actual cash value of the car, which would be $20,000 minus three years of wear and tear. Actual cash value also applies to personal property that can depreciate in value with ongoing use, such as furniture, clothing, electronics, and cameras.
Insurance, with its jargon and complex terms, can be intimidating. However, don’t let that deter you from understanding what would happen to you financially in the event of a catastrophe or claim. After all, when you understand your coverage completely, you can live assured.