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. Do you have questions on your insurance coverage? 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.
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, your insurance will 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, imagine that you suffer a 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 at the time of loss, meaning more money out of your pocket.
