Home Insurance

Actual Cash Value vs. Replacement Cost Insurance

Actual cash value vs. replacement cost is a key decision you need to make when buying homeowners insurance. While both options will reimburse you in the event of a catastrophe, one provides more flexibility. Additionally, your choice affects your premium prices and how much you get as reimbursement if you have a covered loss.

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Buying a house is an involved process that requires the homeowner to make some difficult decisions, both financial and otherwise, especially when it comes to insurance. However, with so many things to consider and spend money on, getting familiar with the finer points of homeowners insurance may not be the first thing on your mind.

However, weighing which variety of homeowners insurance to buy can be more complicated than you think. For example, actual cash value vs. replacement cost insurance is a crucial decision you need to make, as it impacts your premiums and reimbursement in the event of a loss.

The Difference Between Replacement Cost Insurance and Actual Cash Value Insurance

Replacement cost insurance is relatively straightforward. If a covered peril damages one’s property, the insurer reimburses the policyholder for the needed amount of a damaged item. For example, imagine you had an electrical short in your kitchen that damaged your stove beyond repair. With replacement cost value (RCV) insurance, you’ll be able to pick out a similar stove, which will be covered – even if your previous stove was ten years old and outdated.

If you opt for actual cash value (ACV) insurance, the reimbursement is for the actual value of your damaged property. If you were to opt for ACV in the previous scenario, a claims adjuster would assess your stove and provide a reimbursement equal to the real value of the stove, factoring in age and wear and tear.

In many cases, ACV provides considerably less reimbursement than RCV. Therefore, you could still buy the stove of your choice. However, you would need to make the difference between the stove’s costs and your reimbursement.

Replacement cost insurance is often the default when it comes to homeowners insurance. But while it does pay more in most situations, it also comes with higher monthly premiums. Therefore, if you’re looking to pay less per month, an ACV policy may be right for you.

Deductibles and Limits

As with most insurance policies, homeowners insurance includes deductibles as part of the reimbursement process. Deductibles whether you choose ACV or RCV insurance. Additionally, your policy may also have limits, the maximum your policy will pay. These two amounts can significantly affect how much you’ll receive if there’s a covered loss.

What Is Extended or Guaranteed Replacement Cost?

RCV is greatly affected when you figure in your deductible and coverage limits. Adding on extended replacement cost coverage will increase the amount of coverage you get, usually by a set percentage. If your RCV is $500,000 and you decide you’d like to add extended coverage for 30%, then your RCV is raised by 30% to $650,000. These adjustments can be very useful if your entire home suffers a covered loss.

Another way to increase your coverage is to add guaranteed replacement cost coverage. This additional policy can be a lifesaver if your entire home is damaged. Guaranteed replacement cost will pay for any overages if a covered peril destroys your home. For instance, if your home’s limit is $250,000, and the current cost of rebuilding it is $400,000, guaranteed replacement will chip in that extra $150,000.

Deductibles and Limits

Deductibles apply if you add an extended or guaranteed clause to your homeowners insurance policy. The good news is that these add-ons raise the limit your insurance will pay to help cover your losses. With extended coverage, you get an additional percentage of coverage, and with guaranteed, you get as much as necessary to rebuild your home.

What Is Modified Replacement Cost Value Coverage?

Another option is modified replacement value coverage (MCV). MCV is generally a good choice for homes that are either architecturally significant, have historical value and details, or are expensive.

Consider a home built in the 1800s with lath and plaster construction rather than drywall, elaborate crown moldings, and other details that most modern homes don’t have. Replacing this home will take significantly more time and money than replacing a similar-sized modern home. Even a tiny amount of damage to the home could require expensive repairs and skilled workers.

If you own a home like this, the replacement costs are considerably higher than the current market value. Therefore, you might not qualify for standard homeowners coverage and would need a modified replacement cost value coverage. The coverage pays for your repairs using functional and modern techniques, not restoring your home to its original condition.

Deductibles and Limits

The deductible for a modified homeowners insurance policy is just like any other policy. However, the differences are within limits. Modified policies don’t cover all 16 perils that a typical policy does; they only cover ten of them. Also, a modified policy pays for the functional replacement of features. This can mean you won’t get a hand-carved banister; you’ll get a modern, manufactured one.

Which Is Better, Replacement Cost Insurance or Actual Cash Value Insurance?

Deciding between ACV or RCV depends on your situation. While having RCV will ensure you get enough money to pay for a new home and personal possessions, it will also cost a lot more in premiums. An ACV policy costs less in premiums, and if there is a loss, you’ll receive some compensation but only for what your possessions are worth at the time of loss.

For many, the idea of managing higher premiums and having the peace of mind that one’s home and possessions will be replaced is more appealing, so they opt for RCV. If you can’t financially cover the added expense of RCV, then ACV is the better option. ACV can also be a better choice for a vacation home where you don’t store valuables and still have a primary residence to live in if there’s a loss.

If you want even more coverage than RCV allows, an add-on like extended coverage or a guaranteed replacement policy can be helpful.

Further, a modified replacement cost value coverage might be the only option for people with homes that exceed modern values due to age, materials, construction details, or historical significance.

Choosing Between RCV and ACV Insurance

If you’re interested in buying RCV or ACV insurance, your insurance agent can get you the paperwork you need to start this policy. If you’re trying to decide which policy to select, consider analyzing the value of your possessions. Finding that number can help determine whether ACV or RCV will be the better value.

If you’re interested in extended coverage or a guaranteed replacement add-on, you’ll need to document your possessions and home upgrades. The good news is that you can shop around for a reasonable price with these add-ons and RCV and ACV.

If you believe your home qualifies for a modified replacement cost policy, your agent will need documentation and photographic proof that outlines the age and significance of your home. Then, you can begin shopping for a policy.