What’s the difference between replacement cost and actual cash value?

When you buy an insurance policy, you may be given the choice of insuring your property at actual cash value (ACV) or replacement cost. These are two different calculation methods used to determine how much you would receive from your policy to cover an item if it is lost or damaged.

Let’s look at an example: your ten-year-old TV gets stolen.

Replacement Cost

If you have a Replacement Cost policy, your claim will be based on the cost of buying the same TV brand, of similar kind or quality, new; there is no deduction for depreciation.

Actual Cash Value (ACV)

If you have an Actual Cash Value policy, payment of your claim will be based on the cost of buying another ten-year-old TV in similar condition to yours at the time of loss; deprecation is factored into your payment.

When calculating items at actual cash value, the insurance company can charge a lower premium. This is the same idea as increasing your deductible to reduce your insurance costs, except that in this case, your “deductible” is the difference between the depreciated value and the cost of replacing the item.

Market value

Remember that Replacement Cost is different from the market value of your home. If you were to lose your home in a fire, a claim based on Replacement Cost would cover the actual cost of the materials and labour needed to rebuild your home. Your lot is not covered, just the structures themselves.

For more information, contact your Co-operators Financial Advisor, who can give you a quote first to ensure that your premium cost is still in line with your budget.