Actual cash value is a concept that’s used when your insurance company is calculating how much it should pay you for a loss. It is defined as:
Actual Cash Value = Replacement Cost – Depreciation
Your insurance company will calculate depreciation as a specific dollar amount based, in part, on objective criteria (a formula that reflects the category of personal property and its age, among other factors) and in part on subjective assessment (a claims adjuster’s inspection of the item or a recent photograph). Since property usually begins to depreciate or lose value as soon as you buy it, you can see that an item’s actual cash value will usually be less than its replacement cost.
Example: Assume you bought a brand-new personal computer last year for $1,500. Even though you used the computer for only six months before a fire destroyed your house and all the contents, the PC depreciated $500 in value due to use and passage of time. As a result, your insurance company will pay you only $1,000, based on the PC’s actual cash value. That means you’ll have to pay $500 out of your own pocket when you go back to the store to purchase the same PC.
As set forth in the preceding example, unless you change your homeowners policy by endorsement, your insurance company will typically compensate you for losses to your personal property on an actual cash value basis. That amount will likely be insufficient for you to purchase a replacement of the same quality and construction. If you fail to comply with the coinsurance provisions of your homeowners policy, your insurance company will only be required to pay for damage to your dwelling and other buildings based on actual cash value or a percentage of its replacement cost, whichever is greater.
In some cases, you may prefer to receive an item’s actual cash value (e.g., if you do not intend to repair or replace a damaged item and wish to get cash in hand ASAP). Here’s a tip: Don’t accept a settlement payment without questioning the actual cash value calculated by your insurance company. If you believe the figure is too low because your insurer underestimated replacement cost or overestimated depreciation, then make your case for a higher figure. Try to negotiate a compromise. If all else fails, your policy spells out a procedure for settling disputes.
If you have questions about your homeowners policy, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures:
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
