What is replacement cost coverage and actual cash value?

 

When it comes to homeowners insurance, there are typically a couple of coverage options and choosing the right one can have a major impact on your claim. While most insurers these days have made replacement value standard, there are still homeowners insurance policies out there that may only offer actual cash value when it comes to your home coverage and personal property claims.

When it comes to actual cash value and replacement value coverage, it is important to understand the difference as it can have a major impact on your claim check if your home is damaged or destroyed by a covered peril.

Replacement vs Actual Cash Value

Here is a quick overview of the differences between actual cash value and replacement value:

• Actual cash value: Actual cash value refers to coverage where depreciation is considered when determining the value of your home and personal property. This often means your claim check will be much smaller than you expect and, in many cases, will not be enough to cover the cost to replace your personal possessions.

As an example, if your couch is ruined by a covered peril, with an actual cash value policy the depreciation of the couch will be taken into account when setting a value. This means that if you paid $3,000 for a couch five years ago, your claim check could be for $1,500 or less depending on the condition of the couch.

Your insurer will only pay you for what they feel the couch is worth today, regardless of what you paid for it. This will often leave you digging into your own pocket to fully cover the cost of a new couch or other possessions.

• Replacement value: A replacement cost insurance policy will pay out the actual amount it costs to replace your damaged belongings with similar items. This means your insurer will cover the cost of a brand-new couch of similar quality, regardless of the cost, even if the cost runs above the original $3,000 you paid for the couch.

In most cases, the physical structure (dwelling coverage) of your home is covered under replacement value coverage but there may be policies out there that only offer actual cash value for the dwelling portion of the policy so be sure to carefully read your policy and ask questions about anything you do not understand.

Personal property coverage on the other hand can be written as actual cash value or replacement value depending on the insurer. While a replacement value policy is typically a bit more expense, the additional cost is well worth it if you have to make a major claim on your policy.

Should I get an ACV or RCV policy?

The correct answer to this question will vary depending on your individual circumstances but in most cases, if you can afford the small additional premium to move up to a RCV policy, you should.

When the time comes to make a claim, having to cover additional costs due to an ACV policy can be both stressful and expensive. This is especially true if your furniture or other possessions (electronics, clothes etc.) are older and has depreciated significantly.