Actual cash value vs. replacement cost: What’s the difference?

actual cash value vs. replacement cost
If you’ve been researching renters insurance—or casually reading through your insurance policy—you may have come across the terms “actual cash value” (ACV) and “replacement cost value” (RCV).

Though they sound similar, the meaning of actual cash value in insurance and replacement cost value is quite different—and can result in dramatically different payouts when it comes time to file a claim. Let’s take a closer look at actual cash value vs. replacement cost.

What is actual cash value?

Actual cash value (ACV) is the current, depreciated value of an item. Most objects (other than heirlooms, collectibles, and antiques) lose value over time, either by enduring wear and tear, going out of style, becoming obsolete, or all of the above. Let’s explore an actual cash value example: Take your 4-year-old iPhone 6. It may have cost around $800 when you bought it, but its current value is significantly lower—it’s technologically out of date, and after years of use, it’s probably pretty dinged up, which means its ACV may be something like $99.

You can think about actual cash value as resale value. If you were to sell an item on eBay or Craigslist, how much would you be able to get for it? Probably less than what you’d originally paid for it. Of course, when it comes to the question, “How do insurance companies determine actual cash value?” things can be a bit more complicated than that—your insurer may have a set table of depreciated values, or may have a specific formula for calculating ACV. Still, thinking of ACV as “resale value” can be a helpful way to differentiate between actual cash value vs. replacement cost value when you’re trying to remember the difference between the two.

What is replacement cost value?

Replacement cost value (RCV) is the amount of money you’d have to pay to replace your item with a new one of “like kind and quality.” Let’s go back to your iPhone. Your current phone may only be worth $99, but if it’s stolen, you’ll probably have to spend more than that to replace it. In this case, replacing your stolen phone with a new one of similar kind and quality, like a new iPhone 6, could run you $299. That $299 is your phone’s RCV.

Or, let’s say you’re dealing with a couch that’s destroyed in a fire. You spent $5,000 on the couch three years ago, which means its value has probably depreciated to around $3,000. However, in order for you to replace the couch, you’d probably have to spend $5,000 (assuming that’s how much a new version of that couch still costs). In that case, your RCV would be $5,000—even though the original couch was no longer worth that much.

How do ACV and RCV work in renters insurance?

Insurers are subject to certain regulations regarding how they determine actual cash value and replacement cost value reimbursements, and each policy may have slightly different terms. In general, you should be able to recover the ACV of an item immediately upon filing a claim, but you’ll need to actually replace the item and submit a receipt to get a payment for the full RCV.

When you file a claim, your insurer will gather information about your items and determine the answer to the question, “What is the replacement cost value and actual cash value of each one?” They’ll issue a payment for the ACV of your items as quickly as they can, once all claim requirements have been met. (Claim requirements may include submitting things like police reports, photos of items/damages, or relevant receipts.) If you intend to replace an item, you’ll need to buy the new one and submit a receipt.

Then, your insurer will reimburse you for the difference between the actual cash value vs. the replacement cost value. You don’t have to replace the item with something identical—if you decide this is the perfect opportunity to make the switch from Apple to Android, that’s cool, but the replacement item should be effectively similar in quality and purpose.

Jetty and replacement cost value

All Jetty Renters Insurance plans include replacement cost value, as opposed to actual cash value. What does that mean? It means that even though your belongings may have depreciated in value, we’d still pay out the amount it would cost to replace those items. Going back to the couch example: If your 3-year-old $5,000 couch is now worth $3,000, and it’s damaged in a fire (or other covered incident), we’d still pay out $5,000 because that’s how much it’d cost you to replace it.

Remember, depending on the details of your policy and the nature of your loss, your claim may be subject to a deductible. There may also be a limit to how much your insurance can pay out, either per item, or in total. Check your plan for details on how to determine actual cash value and replacement cost value, or talk to your insurer if you have questions.

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