Actual cash value is a term used in the insurance industry to describe the amount of money required to replace something which has been lost, stolen, or damaged beyond repair with something of comparable quality. Many insurance companies are written to provide the policyholder with the actual cash value of the insured item in the event of a loss, and insurers often prefer to carry this type of coverage. However, there are some limitations to actual cash value coverage which people should be aware of when purchasing insurance to cover specialty items.
Put simply, actual cash value consists of the cost of the item when it was new, minus depreciation. If someone buys a brand new car for $10,000 United States Dollars (USD) and crashes it a week later, the insurance company is likely to pay out almost the full face value, recognizing the fact that depreciation was fairly minimal. On the other hand, if the car is ruined 10 years later, the insurance company might determine, after evaluating the car, that actual cash value at that point might be $1,000 USD. This payment would allow the policyholder to replace the damaged car with one of comparable quality: a 10 year old car with similar mileage.
One of the biggest problems with an actual cash value policy is that it does not consider appreciation, when an asset gains in value over time. For things like homes, classic cars, antique furniture, and jewelry, specialty policies need to be written to ensure that the policyholder will be properly compensated for the item if a loss occurs. It can also be difficult to calculate actual cash value for unique objects like works of art, since there is nothing to compare the piece with, and in these cases, a stated value policy may be used instead, with the insurance company and policyholder agreeing on a value and insuring the item for that amount.
When purchasing an actual cash value policy, policyholders should talk with their insurance representatives about their options and the specific terms of the policy. They may also want to think about what would happen in the event of a loss, and discuss their needs with an insurance agent so that the most suitable insurance project is purchased. For example, for someone who works from home, the loss of a home is also the loss of an office, including office equipment and records, and this would therefore complicate a home insurance policy.
