Based on the depreciated value, the actual cash value coverage offers replacement value for a product that has been damaged. Straight line depreciation is the method that is employed.
Furniture is worth $2,500.
Life = 5 years
Depreciation every year is equal to $2,500 / 5 = $500.
How are actual monetary values determined?
Actual cash value is calculated by deducting depreciation from replacement cost, whereas depreciation is calculated by estimating an item's expected lifetime and calculating the percentage of that lifetime that has already passed. The actual cash value is calculated using this percentage multiplied by the replacement cost.
The expenses of repairing or replacing damaged objects following an insured loss are covered by both types of insurance, however replacement cost insurance does not take depreciation into account, whereas actual cash value insurance does.
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