What Is Actual Cash Value?
The actual cash value refers to the value determined after the replacement cost minus depreciation or natural wear and tear, and not the value of the insured subject before the insured event occurred.
Actual cash value
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- Chinese name
- Actual cash value
- Foreign name
- Actual cash value
- Category
- Professional term
- Related field
- Insurance
- Related disciplines
- economics
- The actual cash value refers to the value determined after the replacement cost minus depreciation or natural wear and tear, and not the value of the insured subject before the insured event occurred.
- The actual cash value is in line with the basic principles of insurance benefits and loss compensation. The amount of insurance benefits lost after the insured is measured by the amount of insurance value reduced after the out of the insurance, and the purpose of the property purchase by the insured is usually to use its use value to create new wealth. The insurance protection provided by the insurer should not be dogmatic to provide compensation for the cost of restoring the insured subject exactly to the state before the outbreak, but to realistically restore the insured subject to its original performance and condition to protect the insured Human economic interests.
- If these principles are not followed, the value of the subject-matter insured will exceed its actual value, the insured's compensation will therefore exceed its actual loss, and bad attempts and actions to seek insurance compensation will aggravate moral hazard.
- Formula of actual cash value
- The actual cash value (ACV) is the net value of the replacement cost less depreciation at the time of the loss. This definition is mathematically as in the following equation. Replacement cost is the amount (or partial loss) required to rebuild an identical building. The replacement cost of a house does not equal the average market value of the property, because the market value includes the value of land and location. Location can be an important factor in the value of property, but is not included in the replacement cost. For example, the cost of building a beautiful home in A and B is the same, but if B is located on the downside of an agricultural processing plant that produces a bad smell, the market value of the house in B will be smaller. [1]
- Actual cash value = replacement cost-depreciation
- The depreciation rate is expressed as a fraction. The numerator is the number of years the property has been used; the denominator is the expected useful life of the property. For example: a house has a service life of 60 years, it has been used for 15 years, and the depreciation rate is 1/4. The calculation of depreciation rate is not the same as the accounting concept, because the accounting concept is based on the purchase price, and the depreciation rate used in the actual cash price is based on the estimated replacement cost and the useful life of the property.
- For example, a house has used 1/4 of its life. Its replacement cost is 150,000 US dollars (assuming its historical cost is 100,000 US dollars, the accounting book value appears on the basis of straight-line depreciation is 75,000 US dollars, the two have nothing to do with the calculation of actual cash value). Its actual cash value is 150000 × 3 / 4-112500 USD. In the second example, assuming that the value of the house loss is $ 50,000 (replacement price), the cash replacement price for this part of the loss should be: $ 50,000 x $ 3 / 4- $ 37,500.
- Sometimes insurers do not use actual cash value clauses in their policies. When the replacement cost of a building is greater than the market value, for example, those old buildings often appear, the insurer provides protection based on the replacement cost of modern construction technology. The insurer calls such a provision a functional reset. For example, a functional reset allows wooden walls to replace stucco walls and plastic pipes to replace copper pipes.