What is Actual Cash Value?
An actual cash value describes the total amount of money needed to replace something that has been lost, damaged, beyond repair, or stolen. A lot of insurance companies write to their policyholders the actual cash value of an item which is lost. Insurers prefer to carry this type of coverage, because when something has gone wrong, the current value of the property to be replaced will be paid for. However, there are several limitations that policyholders should be aware of in purchasing insurance to cover valuable items.
Actual Cash Value is replacement cost less depreciation. Example, you bought your television for $900, and you’ve been using it for 3 years and the depreciation is at 7% per year. You multiply $900 by 3 years then you multiply the total to 0.07. The result would show that your television has depreciated by $189. The replacement cost for the television is $900, but if you are not covered by replacement cost in your policy, the Actual Cash Value would only be $711, which is the coverage that you will get.
One of the major coverage on a homeowner’s policy is the dwelling amount. If you need to rebuild your whole house, then this is the right coverage for you. Prices are constantly increasing, therefore, you should keep in mind that the market value of a property is totally different from its replacement value. Better ensure with your insurance company that your insurance policy can cover you for a replacement cost when need be.
You should also make sure that you are not under insured. Replacement value is usually the 20 percent increase of the market value of your house. Example, your house has a market value of $100,000 when you first bought it, and the cost to rebuild it is $150, 000. If your house was accidentally on fire and burnt to the ground, you are only covered for $120,000. You will be responsible for the other $30,000.
One of the problems with actual cash value is that it does not consider appreciation. When a property gains value and it has been lost, proper compensation should be given to the policyholder.
You can avoid being under insured if you have an idea about the replacement costs of your home. All you need to do is talk to your insurance agent about it, and ask him or her to prepare a replacement cost value. Remember that replacement costs are only the costs of rebuilding your home. It does not include the value of your property. In purchasing an actual value policy, check other options and the details of the policy. You might want to check with your agent what happens in the event that there is a loss. Discuss your needs with your agent; tell them why you need the policy. Example, if you are currently working at home, your home then becomes an office as well. In the event that something happens to your home, you didn’t just lose a home, you lost your business as well.