What Does Actual Cash Value Mean?

Insurance is a confusing and sometimes difficult thing to understand. When looking at property insurance, one may come across the term 'actual cash value' that is used to describe how an insurer is going to pay on a policy. This is just one of many ways an insurer can pay back a policy holder should something go wrong with the insured property. Here is a look at what this particular term means, what some of its alternatives are, and whether or not it is a coverage to opt for.

Definition

Actual cash value is a way to determine how much an insurance policy is going to pay out. It looks at the price of an item and determines how much it will take to buy that item new. However, instead of paying this to the insured, the insurance company deducts how much the insured object may have depreciated or suffered wear and tear. This is how they arrive at the actual cash value and it is that calculated number that the policy actually pays.

Calculating Value

Calculating actual cash value takes many factors into consideration. There is no universal way to determine this value across the board for properties or even within an insurance niche such as automotive insurance. Usually, the age of the damaged goods and the estimated wear and tear will be taken into account and fair market value will be determined from that. Where cars are concerned, the blue book value will be used. Where houses are concerned, appraisals will be consulted.

Disadvantages

The disadvantage of an actual cash value policy is that the insured does not get the cash to purchase a new house or automobile outright. Instead, they get an estimate of what their goods would have been worth at the time of the accident or destruction of property. This usually results in financial hardship for the insured because they cannot make up the difference between the actual cash value and the cost of purchasing a new item. However, this policy does carry cheaper premiums.

Replacement Cost Coverages

Opposed to actual cash value policies are replacement cost coverages. These policies will pay for what it would cost in today's dollars to purchase an item new. It is more expensive to carry a policy like this, but it is better coverage all around. If a car was totaled and this was the coverage, then the holder could expect a check for the amount to purchase a brand new, comparable car. The same holds true for house insurance and any other property insurance that holds replacement coverage policies.

Actual cash value can be a confusing term for those who don't know very much about the specific terms of insurance policies. To make matters worse, it seems as if figuring the actual cash value of an item is more an art than a science. Calculating general wear and tear can be nothing more than a guess at best. Be aware when purchasing insurance what sort of coverage you are getting and make sure you are happy with it. You don't want to be left holding the ball should something bad happen.