There is a lot of very specific vocabulary in the world of insurance. Do you sometimes find yourself scratching your head at the jargon? You’re not alone!

In this post, we’re going to get into two very common terms in insurance: actual cash value and replacement cost. When you’re looking for the best insurance rates, it’s important to understand what these phrases mean and how they apply to your home insurance and other insurance coverage.

Actual cash value

Actual cash value (ACV) refers to what it would cost to currently to replace an item with a similar one in the same condition. It’s essentially a valuation of what an article is worth today, taking into account wear and tear. So a sofa that you bought back in the 80s would be valued at less than a sofa that was bought just a few years ago, for example. The insurance company will be looking to figure out the value of the actual article.

Replacement cost

Replacement cost refers to what it would actually cost to replace the item right now. There isn’t any deduction for depreciation factored in. So to go back to the sofa, if yours is destroyed, with an insurance plan that offers the replacement cost, you will get what a similar sofa is worth now, regardless of how worn out or old the sofa in question was. You’re given what you need to replace the item with a comparable, new one at current retail values.

Which one is best?

Wondering what you should go for with your home insurance? If you’re looking for the cheapest option possible, generally plans based around ACV are less costly. They pay out less benefits which allows for the savings. If you don’t have a lot of stuff, or tend to buy frugally, such as choosing second hand over brand new, ACV could be a good option for you.

However, for many people, going for replacement cost is worth the additional premiums as you will get more out of it should you need to make a claim. Your insurance broker can discuss these options with you and assist you in selecting the right coverage, at the right price.

Have some other insurance jargon on your radar that you’d like clarified? Check out our blog posts defining common terms and peruse our full glossary of insurance terms here.

Not sure what direction to take with your home insurance coverage? Need some guidance on what would be best in your scenario? Get in touch with us today.

We have provided the definitions in this blog post for general information purposes only. They are not meant to be complete descriptions to cover any and all terms, conditions and exclusions that are found in different insurance policies. If there is any inconsistency between this information and the definitions in your policy, it is your policy that governs. Contact your insurance broker if you have any questions or need any clarification about your particular policy and the definitions therein.

Image source: FreeDigitalPhotos.net | Stuart Miles