Understanding “replacement cost” versus “actual cash value” when it comes to your policies is important.

Replacement cost

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.

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.

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.