Actual cash value means that the insurance company pays the market value for your damaged or stolen vehicle. Replacement cost means that you are compensated for the cost of a new car. Insurance companies almost universally favor actual cash value compensation.

Let’s look at some more details and which type of insurance might be best for your situation.

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Replacement Cost Explained

If you buy a new vehicle, the value of the car drops as soon as you drive it off the lot. In fact, new cars can lose up to 11% of their value upon purchase. If the vehicle is stolen, replacement cost insurance will reimburse you for 100% of the value of a new car.

This level of insurance is not included in every policy, and may not be available by all insurers. Opting for replacement cost car insurance will also increase your monthly premium.

Actual Cash Value

The traditional insurance definition of actual cash value is the cost of a new or similar replacement item, minus depreciation. What’s depreciation? Remember the value your car lost driving it off the lot? That’s how much a new car depreciates when it’s purchased. Nearly all vehicles (except exotic collector models) depreciate over time.

Another way to look at actual cash value is to consider how much your car would have sold for in the used car market. For this reason, actual cash value is also referred to as the “fair market value.”

Actual cash value is pretty much the standard level of coverage that comes with comprehensive car insurance. Like replacement cost insurance, comprehensive car insurance is optional insurance and will increase your monthly premium.

Which One Should I Choose?

Every insurance decision depends on your level of comfort with risk. If you absolutely want zero risk and full compensation, replacement cost car insurance is for you. Otherwise, actual cash value (comprehensive) coverage will be a more economic choice.

Some drivers even opt out of this type of coverage altogether in order to minimize their monthly car insurance payment.

Is Auto Insurance Required?

Except for a few exceptions, car insurance is required in every state. In particular, liability insurance is required by law in most states. If you are in an accident and cause damage or injury to another party/vehicle, liability insurance covers the damages.

Collision insurance, which pays for damages to your car in an accident, is not required by law. Comprehensive car insurance, which covers theft or damage by weather or natural disaster, is also optional.

Don’t Forget The Deductible

Remember that for all types of insurance, there is usually a deductible. This is the amount you pay out of pocket for any losses before the insurance payment begins. The higher the deductible, the lower your monthly car insurance premium.

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Published in CARCHEX Auto Insurance Resources by CARCHEX on February 5, 2016