Types of Coverage: Replacement Value vs. Actual Cash Value

Auto Refinance

Whether you are purchasing auto, homeowners or renters insurance, there are two types of coverage that you will need to consider: Replacement Value and Actual Cash Value. In most cases, Actual Cash Value is the standard coverage that is included in the insurance policy – and it is also the less expensive coverage. However, it is worth considering the value of the asset (car or personal items in your home) that you are insuring to determine which coverage is right for you.

In case you are wondering what is the difference, here is a basic explanation of Replacement Value and Actual Cash Value insurance.

Replacement Value

Replacement Value insurance allows you to replace your stolen or totaled car with a similar car at the current market value – no matter the age and condition of the car you had. For example, if you purchased a brand new car three years ago and it had substantial mileage or wear and tear at the time you were in an accident, your insurance company would pay out enough to purchase a current model of the car you bought three years ago.

Actual Cash Value

Actual Cash Value insurance will pay out what your 3-year-old car was worth at the time that it was damaged or stolen. Actual Cash Value insurance will take into account that you owned the car for three years and that it had a certain amount of mileage and wear and tear, which means it will not be valued at the same price when you initially bought it since all cars depreciate in value. If you wanted to replace your damaged or stolen car with a new and similar model, you will have to use some of your own money to make up the difference since the insurance payout will not be enough to cover the full cost of a new car.

One way to figure out which coverage is best for you is to think about the value of your property and the potential cost to replace it should it be damaged or stolen. On the one hand, choosing Replacement Value insurance guarantees that you will be able to fully replace your property at the current market value. The downside to this coverage is that the monthly insurance premium will be significantly higher than Actual Cash Value insurance. On the other hand, choosing Actual Cash Value insurance is typically more budget-friendly. However, in the event that you need to replace your property, you will likely not receive enough claim money to cover the full cost.