Actual Cash Value vs. Replacement Cost for Home Insurance
Your home insurance policy should give you the coverage you need to best protect what matters most. But there are a lot of coverage options out there. Understanding what those are helps you select a policy that’ll give you the protection you need to repair, rebuild or replace after a major covered loss. Have questions on how much coverage you’ll need? Understanding actual cash value vs. replacement cost can help.
What Is Actual Cash Value?
After a loss, actual cash value (ACV) coverage pays you what your property is worth today. Actual cash value is calculated by taking what it would cost to buy your property new today, and subtracting depreciation for factors such as age, condition and obsolescence.
What Is Replacement Cost Value?
Replacement cost value (RCV) is the amount it costs to replace your property with new property, without deducting for depreciation. Meaning in the event of a loss, we’ll pay you enough to replace your damaged property with new property of the same type, kind and quality and you won’t have to worry about paying more than your deductible to cover the damage.
ACV or RCV — Which Coverage Is Better?
To better understand if you need ACV or RCV coverage for your property, let’s take a look at a couple scenarios. For example, say your stove was damaged from a kitchen fire. You decide to make a claim to your insurance company and have already met your deductible. You start looking to replace your stove, which you bought ten years ago. You and your claims adjuster are finding that it would cost $3,500 to replace your stove with a similar stove today. Your insurance company will pay to replace your stove depending on the type of coverage you have:
If you only have ACV coverage, the insurance company would pay some dollar amount less than $3,500 (for example $350) because that’s how much your stove is worth today (starting with the cost to replace of $3,500 and taking into account its age, wear and tear, etc.).
If you added RCV coverage, your insurer will pay you the full cost of $3,500, since that’s what it would cost if you bought a similar stove today. Keep in mind, your insurer might initially only pay you the ACV amount to get you started and pay the remaining amount after you’ve actually replaced your stove .
Now imagine that you suffer a much larger loss, for instance if your 10-year-old roof was destroyed by hail or a windstorm. Having RCV coverage means that after your deductible is satisfied you will receive the full cost to replace or repair your roof without a deduction for depreciation. If you have ACV coverage for your roof, your payment will be reduced to account for your roof’s age and condition
The actual cash value of your property is the value for which your property could be sold today — which is usually less than what it would cost to replace it. That’s why replacement cost coverage for your damaged or stolen property is typically the most popular option, since it compensates you for the full cost of replacing your property.
When you have ACV coverage, you’ll usually pay a lower premium than if you have RCV coverage. But, simply put, you work hard for the things you own — if you want to replace the belongings you had before the loss, ACV offers less protection than RCV and you’ll have to pay out of pocket to fill in any gap that’s not covered.