What is the difference between actual cash value (ACV) and replacement cost?

Actual Cash Value (ACV) and replacement cost are two distinct methods of valuing property in insurance. The definition of ACV plays a crucial role in understanding this difference. ACV is calculated as the replacement cost of the item minus depreciation. This means that ACV takes into account the wear and tear, age, and usage of the property, resulting in a lower payout in case of a loss compared to the replacement cost.

Replacement cost, on the other hand, refers to the amount it would take to replace or repair the property with a similar one at current market prices without considering depreciation. This method ensures that the insured can replace their lost or damaged property with a brand-new equivalent, thus offering broader coverage.

The correct choice highlights that ACV does indeed consider depreciation, which is a key factor distinguishing it from replacement cost, which provides coverage regardless of the property's current condition or age. Understanding this distinction is fundamental for policyholders when evaluating their insurance options and coverage types.