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Home Insurance

Homeowners Insurance: Actual Cost Value vs. Replacement Cost

If you’re in the market for homeowners, renters, or a condo insurance policy, you’ll need to decide if you want an actual cost value or a replacement cost policy. Even if you already have an insurance policy to protect your residence, you’ll want to check what type of coverage you have. Having the right insurance makes a big difference in the protection you get if there is a loss in your home.

ACV v RCV

If you’re in the market for homeowners, renters, or a condo insurance policy, you’ll need to decide if you want an actual cost value or a replacement cost policy. Even if you already have an insurance policy to protect your residence, you’ll want to check what type of coverage you have. Having the right insurance makes a big difference in the protection you get if there is a loss in your home.

When you sign up for a homeowners and renters insurance policy, you’re protecting your home and your possessions in case of a loss. In most situations, your insurance covers the structure on a replacement cost basis. But you can choose to have actual cash value (ACV) or replacement cost value (RCV) coverage for your personal property. You make this choice when you sign up for insurance.

Actual cash value is the item’s value minus depreciation, which can be a considerably smaller payout than RCV. Replacement cost value is determined by what it would cost for you to replace that item today. Let’s take a closer look at how this choice affects your renters and homeowners insurance.

What Is Actual Cash Value (ACV)?

Insurance companies determine ACV by looking at the replacement cost of the items that were damaged or stolen and then subtracting depreciation. Depreciation refers to wear and tear along with aging. An easier way to think of it is that actual cash value is what the damaged or stolen item is worth today.

An ACV insurance policy does not replace the lost item or give you the money to repurchase it; it reimburses you for the item’s current value. An insurance adjuster will review the cost of replacing the items and subtract the depreciation amount to determine the value. The remaining balance is what you’ll receive.

How Does ACV Work?

To understand ACV, let’s look at an example. Someone steals your television from your home. You paid $1000 for the television three years ago, but it’s only worth about $300 today. This means the insurance company will reimburse you for the $300 value of the TV, not the cost of a new one.

With an ACV homeowners or renters insurance policy, you might not receive enough money after a peril to cover your damaged or lost property. This is why an ACV plan usually has lower premium payments than an RCV policy.

Advantages of ACV

The main advantage of an ACV policy is that it costs less than an RCV policy. In most situations, your insurance will not pay to replace an item with a new one, they’ll pay you for the value of the old item, which costs them less, so you pay less in premiums.

Disadvantages of ACV

The primary disadvantage of an ACV policy is that you usually will not get enough money to replace lost or damaged personal property. You could be stuck with most of the bills to replace your stuff.

What Is Replacement Cost Value (RCV)?

A replacement cost value policy pays to replace lost, stolen, or damaged items. They do not care about the item’s condition; they will reimburse you for the total replacement value. This coverage usually applies to your home or the structure you live in, and you can purchase it for your personal possessions.

RCV is often preferred because its goal is to restore you to where you were before by replacing or repairing items in a covered peril. You will still have to pay your deductible, and policy limits apply, but other than that, there will not be any out-of-pocket expenses. The downside is that this type of insurance is more expensive because your insurance company will pay more if you file a claim.

How Does RCV Work?

Let’s look at an example to understand further how RCV works. If a fire in your kitchen destroys your 20-year-old oven, your RCV policy will pay you to get a new one. Even if the old oven was not worth anything, your RCV policy would pay for a new oven that’s similar. They will not get you a top-of-the-line oven, but you’ll have some options for a modest stove with features similar to your old one.

Advantages of RCV

The most significant benefit of having an RCV policy is that you’ll get the total amount of replacing lost, stolen, and damaged items. If there is a fire and you need to replace everything, you’ll be responsible for the deductible; after that, your insurance will cover the replacement of the rest of your belongings.

Disadvantages of RCV

People do not select an RCV policy mainly because of the higher price associated with this type of coverage. If you have a covered loss, your insurance company pays for you to get new items to replace your damaged ones. This can be very expensive for the insurance, and they pass those expenses along to customers through higher rates.

Difference Between Actual Cash Value and Replacement Cost Value

There are a couple of significant differences between ACV and RCV insurance. The first one most people purchasing homeowners insurance or renters insurance consider is price. The cost of your monthly bills is important and plays a significant role in your insurance purchase decisions. RCV insurance is more expensive than ACV because they pay more if you have a covered loss.

The next big difference is how much coverage you’ll receive if there’s a loss. ACV only pays you what the item is worth today, while RCV pays you to get a new one. This is a huge difference, especially when you break it down. Let’s assume you bought a $3000 couch five years ago. Today that used couch is worth $1500, and that’s what you’ll get with an ACV policy if that couch is damaged. With an RCV policy, you’ll get whatever the price is to replace that couch, even if the price has gone up to $4500.

Both RCV and ACV insurance policies will have deductibles and coverage limits. Your policy determines these, so it pays to research this to see what the numbers are. The deductible is the amount you’ll be required to pay out-of-pocket before insurance payments begin. Your coverage limit is the maximum your insurance company will pay for a claim. Once you hit your coverage limit, you’ll have to pay any additional expenses.

Should You Get Actual Cash Value or Replacement Cash Value Coverage?

An RCV policy is better for helping you recover from a loss. This insurance will pay to replace your items, regardless of the value of the lost items. The problem is that this insurance is expensive, which might not be affordable for some people.

ACV policies still give you protection and coverage if there is a peril. You will not get the total amount you need to replace your personal property, but you will get what your items were worth, which can help immensely. It also gives you peace of mind that’s affordable.

Ultimately, the decision comes down to what you can afford and what you own. If you need more coverage and can afford it, then RCV is the way to go. If you cannot afford RCV, then ACV is the best option, and you can save any extra money you have as a backup plan in case you have a claim in the future.