State Farm Insurance License Practice Exam

What does Actual Cash Value (ACV) represent in insurance?

1. Replacement cost plus depreciation

2. Today's replacement cost minus depreciation

3. Total value of property before any depreciation

4. Value of property plus appreciation

The correct answer is: Today's replacement cost minus depreciation

Actual Cash Value (ACV) in insurance is defined as today's replacement cost of an asset minus depreciation. This method reflects the current value of the item as it ages over time, taking into account wear and tear or obsolescence that reduces its value. When an insured item is damaged or destroyed, the settlement amount will typically represent what it would cost to replace that item new at today's prices, adjusted for depreciation to account for its used condition. This ensures that the policyholder receives a fair compensation reflective of the item's value at the time of the claim, rather than its original purchase price. In contrast, other options do not accurately define ACV: replacement cost plus depreciation does not align with the concept, since ACV focuses on deducting depreciation rather than adding anything. The total value of property before depreciation misrepresents how ACV calculates value post-accident or loss. Lastly, the idea that ACV includes appreciation fundamentally misunderstands the principle of depreciation, which is central to the ACV concept.