Actual Cost value V/S Replacement cost - Need clarity

ash.mur

Hello Guys

Need clarity on exact difference between Actual Cash value V/S Replacement cost. It would be much helpful, if some one can explain with the example, i have an understanding in my mind, not sure it is correct. The example that will come out , will help in polishing my understanding. Thanks in advance

5ekurity

Take the roof of a house for example. Let's say a house is being insured, and given the fact the roof is 25 years old, is more likely to have something bad happen (i.e. shingles get blown off). New, let's say the roof would be valued at $10,000, which would be the Replacement Cost.

The actual cash value of a 25 year old roof would be a fraction of the $10,000, because the roof is 25 years old and has lost value over the years. It might only be valued at $2,000 due to its age. So in the event of something bad happening to that 25 year old roof, the home owner would only receive $2,000 from the insurance company, and have to cover the remaining amount ($8,000) out of pocket in order to replace the roof.

Hope that helps!

ash.mur

Hey Sekurity

That was a nice example. I think i got cleared on the concept now.

Replacement cost = Insurance money provided to replace the cost and none is added or deleted to this
Actual Cost value = Replacement cost - Depreciatation . Here it would be $10,000 - 8000$

Thanks a lot for the explanation.