When insurance companies calculate the amount they will pay out for a loss, they typically choose between the replacement cost or the actual cash value. The replacement cost tends to be more favorable to the client since it guarantees the insured a payout equivalent to a new replacement. On the other hand, the actual cash value, also described as the market value, is the replacement cost minus depreciation. ACV allows for a lower premium. It saves the insured money in their monthly payments but it pays out less should a claim be filed.
For example, if a client is insuring a $1,000 computer, the ideal plan would be replacement cost value since they would get a payout for a new computer. If an actual cash value plan was selected, the payout would be less, especially due to the fact that technology depreciates quickly. The difference between both of these methods is depreciation. Using the same example, here is a look at both methods:
Replacement Cost: $1,000. The insurance company may pay out a percentage of the replacement cost up front, and the rest upon proof a purchase.
Actual cash value: assuming a 15-year life expectancy and 5% depreciation per year. If the claim is filed after 5 years:
5 years times 5% = 25%
$1,000 x $25% = $250
$1,000 – $250 = $750
In this case, the insured would receive a check in the amount of $750. If the client chooses to upgrade when purchasing a new item, they would still only be reimbursed the replacement cost of the original item.
How can you make the decision on which method to use? Contact us today to find out which coverage fits you and your company best. We look forward to hearing from you and serving you with an insurance policy that for your needs.