Actual Cash Value

In determining the manner in which policy holders will be reimbursed for losses, insurance companies work on two standard payment models - actual cash value (also known as market value) and replacement cost. The method preferred by the insurance companies is actual cash value, which is calculated by taking the replacement cost of the insured item and subtracting depreciation factors from its worth. It is the amount, in essence, that the policy holder would receive were the item in question to be put up for sale on the open market.

For instance, if a home computer were covered under the terms of a home insurance policy the actual cash value of a machine that is four years old would be a lesser expense to the insurance company than the replacement cost of a new machine. Replacement cost, on the other hand, is the payment model preferred by policy holders as the better "deal" actually creating situations in which the replaced items may be newer and of better quality than those that were lost or damaged.

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