Definition of Actual Cash Value

What does the term "actual cash value" mean? What is the definition of the term "actual cash value"?

You may have run into the term "actual cash value" when looking over your home insurance policy.

Actual cash value is the cost of replacing a damaged or stolen item, less depreciation. On the other hand, "replacement cost" is the cost of replacing a damaged or stolen item without taking depreciation into account.

The exact definition of "actual cash value" can vary. Some will say that "actual cash value" is the value that an item would fetch if you had to sell without any undue time restraints. So, for instance, if you had to sell a 42 inch plasma TV without any time restraints, how much would the TV fetch in an open market? That is how some people determine "actual cash value".

Other people will figure "actual cash value" like this. Let's say that a 42 inch plasma TV cost $1,000 new. Let's also say that the expected lifetime of the TV was 5 years.

Assuming that the TV would be worthless in 5 years, this would mean that the TV would depreciate by $200 each year. So, if your TV got stolen and you had owned it for one year, then the "actual cash value" of the TV would be $800.

In short - it is definitely preferable to have "replacement cost" on your homeowner's policy rather than "actual cash value".

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