Understanding Actual Cash Value vs Replacement Cost

Homes are one of the largest purchases that you make in a lifetime. As a homeowner, being open to learn the best ways to protect your investment is key to choosing the right coverage for you and your family. Unfortunately, many homeowners do not learn the difference between Actual Cash Value, Replacement Cost and Depreciation until a claim occurs.

• Actual Cash Value (ACV) is when your insurance company only pays for what your property is worth at the time that you file a claim. Actual cash value is the price or value your item could be sold for today. It is the cost that you paid for the item minus any depreciation. This means at the time of a claim, the settlement from an insurance carrier traditionally will payout less than what it costs to replace the current item. ACV policies traditionally cost less than Replacement Cost polices, however, at time of the claim, the ACV policy will have lower reimbursement.
• Replacement Cost Value (RCV) is the opposite of ACV. This coverage does not consider depreciation and fully pays your property’s replacement costs.  With RCV, you are reimbursed with comparable quality.

As a homeowner, these options are very important to consider. The most comprehensive way to replace an item or rebuild a home is utilizing a Replacement Cost Value. The additional cost of a Replacement Cost policy vs an Actual Cost Value policy is minimal compared to the possible loss of reimbursement with an Actual Cost Value claim.

Potential Real-World Example:

A $15,000 roof that is 10 years old and the home policy has a $1,000 deductible.

• If a covered event destroys your roof and you have Actual Cash Value coverage that depreciates the roof’s value by $600 per year, your out-of-pocket cost of replacing the roof would be $15,000 minus $7,000 (the Actual Cost depreciation of $6,000 and your $1,000 deductible), leaving you with an $8,000 reimbursement.
• A Replacement Cost Value policy would only have you paying $1,000 out-of-pocket for the deductible and give you a $14,000 reimbursement.

Have you evaluated what your home policy covers and the potential out-of-pocket costs that you could be subjected to?  It is better to know what to expect in the event of a covered claim than to be caught by surprise. At AssuredPartners, we educate clients regarding the differences of these and how they impact the amount of the payout. To learn more, visit AssuredPartners Personal Insurance.