This is one of those cornerstone ideas when it comes to homeowner’s and renter’s insurance, will your insurance company give you the actual cash value (ACV) of a loss or will they give you the replacement cost? The two are entirely different and it’s important that you review your policy to see what you have. Actual cash value is the value of the item the moment you lost the use of it. It’s essentially your purchase price minus depreciation (loss of value) over time. Replacement cost, however, refers to how much it would cost for you to replace the item, not how much it’s worth.
Here’s an example, let’s say you bought a CD player three years ago for $100. Now, it’s worth about $10. A policy that reimburses you for actual cash value would give you $10 (minus your deductible, which is likely over $10 but let’s forget that). If you had replacement cost coverage, then they’d first send you $10 and then you can go out and buy a new CD player, send them the receipt, and they’d send the balance.
Obviously, the premiums for a replacement cost policy are higher than an actual cash value policy.
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