The worst has happened: Someone stole your car and stripped it to pieces! Now, all you’ve got left are fond memories of your slick ride and an insurance policy claim to file. All you want to do is put this whole ordeal behind you, buy a new car, and never look back. But will your insurance payout cover the cost of that same car? Understanding “replacement cost” versus “actual cash value” when it comes to your policies is important.
Replacement cost policies will pay out the cost necessary for a direct replacement of the item covered. So, for example, if your vehicle was a 2019 Dodge Charger, the policy would pay out whatever costs you would incur to get that same vehicle back in your driveway.
Here’s why replacement cost matters. Let’s say you just bought your 2019 Dodge Charger a few weeks ago, fully loaded and brand new. You might have paid $40,000 for it at the dealership, but as soon as you rolled it off the lot it became a “used car” with a value of just $34,000. If your insurance company were to pay out the actual cash value of the car — what someone else would pay for your used car — you’d end up about $6,000 shy of being able to buy a brand-new Dodge Charger. It’s a disappointing prospect to consider.
With replacement cost policies, there’s no deduction for depreciation, which can give you peace of mind when it comes to making investments that may lose value with time, even if you keep them in great condition.
Actual cash value
Actual cash value policies use a different benchmark for determining what your item is worth. Rather than compare it to a new version of the same item, actual cash value policies consider things like condition, demand, and depreciation.
For example, if your car was a 2007 Dodge Charger, it won’t have the same value as a 2019 model or even other more gently used 2007 models. In this case, your insurer would have to make considerations regarding the car’s market value. An insurance company might look at variables such as:
- Records of damages or repairs
- Vehicle condition
- Last recorded mileage
- Modifications or updates
In this way, the actual cash value payout from your policy could vary greatly. If your car had low mileage and a stellar maintenance record, its value might be higher than if it had an accident on record, high mileage, and rust. To put things in even more perspective, Kelly Blue Book lists the fair market range of a 2007 Dodge Charger between $4,450 and $5,809. A swing of nearly $1,400 could definitely impact your ability to replace your car.
Making the right policy choice
All this information begs the question: Which policy is right for you and your items? The answer really depends on what you’re insuring. As a rule of thumb, items subject to depreciation generally favor replacement cost policies while items with a relatively fixed cost or strong market value benefit from actual cash value policies.
It behooves you to think about the costs you’d be facing if anything were to happen to your property and ask yourself, “How much would I have to pay to replace this?” It’s also a smart idea to ask your insurance agent to help you understand each policy in the context of the items you’re looking to insure, whether it’s a car, painting, jewelry, or another valuable item.