In the
property
Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...
and
casualty
Casualty may refer to:
*Casualty (person), a person who is killed or rendered unfit for service in a war or natural disaster
**Civilian casualty, a non-combatant killed or injured in warfare
* The emergency department of a hospital, also known as ...
insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
industry, Actual Cash Value (ACV) is a method of valuing insured property, or the value computed by that method.
Actual Cash Value (ACV) is not equal to replacement cost value (RCV).
ACV is computed by subtracting depreciation from replacement cost. The depreciation is usually calculated by establishing a useful life of the item determining what percentage of that life remains. This percentage multiplied by the replacement cost equals the ACV.
As an example: a man purchased a television set for $2,000 five years ago and it was destroyed in a hurricane. His insurance company says that all televisions have a useful life of 10 years. A similar television today costs $2,500. The destroyed television had 50% (5 years) of its life remaining. The ACV equals $2,500 (replacement cost) times 50% (useful life remaining) or $1,250.
This concept is different from the
book value
In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. T ...
used by accountants in financial statements or for tax purposes. Accountants use the purchase price and subtract the accumulated depreciation in order to value the item on a balance sheet. ACV uses the current replacement cost of a new item.
Other methods of insurance valuation
Insurance policies may be purchased capitalizing several different valuation methods. These include:
Replacement Cost Value (RCV), Fixed Value (Guaranteed Replacement Cost) and Actual Cash Value (ACV). Some policies will use different calculating methods depending upon the item. For example, the building may be insured at Replacement Cost Value, the most of the contents insured at Actual Cash Value and a few specific items at a Fixed Value (antiques). Policies may also include
co-insurance
In insurance, co-insurance or coinsurance is the splitting or spreading of risk among multiple parties.
In the United States
In the U.S. insurance market, co-insurance is the joint assumption of risk between the insurer and the insured. In title i ...
clause or
deductible
In an insurance policy, the deductible (in British English, the excess) is the amount paid
out of pocket by the policy holder before an insurance provider will pay any expenses. In general usage, the term ''deductible'' may be used to describe o ...
s provisions which will impact the actual cash paid out by the insurance company.
[ Wednesday, 6 January 2021 ]
See also
Cash value
Cash value refers to an investment component in life insurance that grows tax-free over the course of the policy's life. Cash value is a part of permanent life insurance policies and is a living benefit that the policyholder can use during his or ...
References
Property insurance
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