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ACV Versus Replacement Cost

In the auto insurance world, there is an abundant amount of industry jargon that consumers have to pick through in order to understand their coverage. A lack of understanding about auto insurance terminology can prevent policy holders from even knowing what kind of coverage they have, and how protected they really are. As a consumer, you have a right and a responsibility to understand your auto insurance policy. One of the common areas of misconception among policy holders is the difference between actual cash value (ACV) and replacement cost coverage. Failing to recognize what each of these coverage types represent can cause you a whole lot of frustration when it comes time to file a claim against your coverage. Prepare yourself by making it a point to learn what each of these terms means, and by looking at your own coverage to understand which one of the two you are really getting for your auto insurance dollar.

Actual Cash Value (ACV)

Actual cash value coverage is basically the default level of coverage offered on most auto insurance policies. A simple way to describe or define actual cash value as it relates to your auto insurance policy is how much something is worth today. Actual cash value can also be thought of in simple mathematical terms. It represents the replacement value of an item, minus depreciation. To understand actual cash value, then, you really need to know about depreciation.

In the auto industry, depreciation is a key term to understand. When you purchase a new automobile from a dealer and take it home, depreciation has already begun to occur. A car or truck depreciates in value as it gets old. The rate at which it does so depends to some extent on a variety of factors. One of them is the make and model of the vehicle. Some brands are noted for keeping their value over a long period of time. This might be because used cars of these brands tend to be more reliable, or to show more durability as the years pass and the miles pile up. It can also be simply because they tend to sell for higher prices as used vehicles. In any case, when you purchase a new vehicle you can look at years' worth of statistics demonstrating how different makes and models have done with respect to depreciation through the years.

Certain types of trucks tend to depreciate slower than small, inexpensive passenger cars, for example. Depreciation is something that happens to all vehicles regardless of who owns them or how well-maintained they are. No one would pay the original sticker price for a two-year old truck with 40,000 miles on it, when they could go to the auto dealer down the street and get a brand-new truck for the same price. Basically, it is very simple to think of depreciation as the amount the vehicle loses in saleable value as the years go by. So, actual cash value can be thought of as simply how much you might expect to get for your vehicle if you sold it today. Actual cash value coverage on an auto insurance policy is based on this hypothesis, and offers coverage based on that dollar figure. It's also important to point out that while some courts have interpreted actual cash value to be equal to fair market value (i.e. the amount of money you could get for a vehicle if there were no time constraint based upon the sale), in most cases insurance companies look at it as something closer to the amount of money you could get for a car or truck if you sold it today.

Full Replacement Cost

In contrast to ACV coverage, replacement cost (sometimes referred to as full replacement cost or guaranteed replacement cost) does not take into consideration the age or condition of the covered automobile. In dollar terms, its concern is not with the actual covered car or truck itself, but rather with the amount of money the policy holder would have to come up with to replace the covered vehicle with a new one similar to it. One example could be in a pickup truck. A policy holder may be driving a ten-year-old pickup with a single cab and short bed, and an eight-cylinder engine. The replacement cost as determined by the insurance provider covering the truck would be based on how much it would cost to buy a truck with those same features brand-new from the dealer if something were to happen to necessitate such a purchase today.

It would be remiss to only focus on the vehicles themselves in this discussion, as auto insurance does more than cover just vehicles against the risk of damage. The definition of replacement cost (as well as the definition of actual cash value) also must be extended to include the cost of replacing non-automotive property damaged in liability situations. A typical liability policy includes provisions for property damage coverage up to a stated monetary limit. That dollar figure may represent the replacement or actual cash value of a piece of property damaged in a liability accident, depending on the language of the at-fault driver's policy.

It is clear from this brief discussion into the difference between actual cash value and replacement cost that such a difference can have important ramifications for your auto insurance policy. As a very general rule, actual cash value is the rule of thumb in auto insurance. When you purchase an auto insurance policy for a new vehicle, the coverage you usually are paying for is based upon ACV. This is the reason so many car owners have to turn to GAP (guaranteed asset protection) coverage to safeguard their investment when they buy a new vehicle with little or no money down. If you total a $40,000 truck you owe $39,000 on a month after the purchase date, the actual cash value may be something like $36,000, leaving you still owing substantial money for a truck on its way to the scrap heap.

Know the Difference and Save

Although actual cash value can probably be considered the default level of auto insurance compensation, policy holders do have the option of upgrading to replacement cost auto insurance coverage. This optional coverage for your vehicle is especially suitable for newer vehicles, in which you may have negative equity as you battle early depreciation while trying to pay down debt, or for those who maybe own a vehicle outright that they could not afford to replace if there was a loss. Replacement cost auto insurance has the advantage of providing policy holders with the funds necessary to go out and buy a new automobile without significant out of pocket expenses. Deductibles still do apply, of course [1].

The written language describing auto insurance policies can be hard for even the most well-read to understand. Getting a better grip on some of this terminology can give you a more accurate idea of what you are actually getting for the money you spend on auto insurance. On top of that, it may also motivate you to upgrade or make changes to your own auto insurance policy.

[1] http://www.pennnationalinsurance.com/Portal/PersonalInsurance/AutoReplacementCostCov.aspx Retrieved 2010-01-02.

 

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