Question

Assume your 10-year old home originally cost $300,000 and is expected to have a 50 year life. Unexpectedly, a fire totally destroys your home and the home is now worth $350,000. Under the actual cash value method, what will the insurance company pay you?

a) $300,000
b) $325,000
c) $350,000
d) $375,000

Answer 1

The insurance company would pay the actual cash value of the home, which is the current value minus depreciation over 10 years, resulting in a payment of $290,000.

Step-by-step explanation:

When an insurance company uses the actual cash value method to determine the payout after an incident, they typically consider the depreciation of the item insured. The formula for actual cash value is the replacement cost minus depreciation. In this case, the home originally cost $300,000 and is expected to have a 50-year life. Since the home is 10 years old, it has depreciated for 10 years. The depreciation is (10 years / 50-year life expectancy) x $300,000 original cost = $60,000. So the actual cash value would be the current value, $350,000, minus the depreciation, which is $60,000; therefore, the payment from the insurance company would be $290,000.