Homeowners, renters and condo insurance is designed to reimburse you for losses caused by a covered peril. Depending on the type of claim you file, your insurer will determine the cost to replace or repair your belongings or home by looking at actual cash value (ACV) or replacement cost value (RCV). Claims related to the physical structure of your home are generally settled on a replacement cost basis. Personal property claims may use ACV or RCV, depending on your policy.
Actual cash value coverage takes depreciation and normal wear and tear into account when settling claims. It generally applies to the personal property portion of your homeowners policy. For example, if he bought a new bed for $1,500 five years ago that was recently ruined in a fire at his house, it is unlikely that he will be reimbursed for the full cost of the mattress. If that claim is approved, you will receive only the Current Estimated Value, which will be a fraction of the original amount you paid, less any deductible.
Reimbursement also depends on your policy’s coverage limits and deductible amounts. For example, if your bed is valued at $900 and your deductible is $500, your insurer will only reimburse you $400 for the damaged bed. Similarly, if your roof is damaged and the ACV is $15,000 but your policy limit is $10,000, your insurer will only reimburse you for costs up to $10,000. You will be responsible for paying the remaining expenses out of pocket. Because stroke policies often provide less coverage than their RCV counterparts, they are generally the cheapest insurance option.
Unlike actual cash value coverage, replacement cost value does not take into account depreciation or wear and tear. Instead, it reimburses you based on how much it would cost to replace, repair or rebuild your property at current prices.
As with stroke, your policy’s coverage limits and deductibles will apply. For example, your home was destroyed in a fire and your policy includes $300,000 in replacement cost value coverage. If the cost to rebuild is $290,000, your insurer will reimburse you for the full cost of rebuilding your home, less your deductible. However, if the total reconstruction cost is $350,000, you will have to pay the additional $50,000, plus deductibles, out of pocket.
Extended replacement cost coverage is a policy add-on that increases your RCV, usually by a percentage, in the event a covered peril results in costs exceeding your policy limit. Depending on the policy and insurer, this amount can be as low as 10%, or as high as 50% or so. If you have a $300,000 coverage limit on your home, for example, and you opt for 20% extended replacement cost, that would give you $360,000 to rebuild if your home was destroyed, less any policy deductible.
Homeowners looking for maximum coverage may decide to purchase guaranteed replacement cost coverage as an add-on to ensure they can rebuild or repair their home to its original condition. This coverage will reimburse the policyholder for the full cost (less deductibles) of restoring your home to its original size, specifications, and finishes.
For example, if you have a $300,000 limit on your homeowners coverage and the cost to rebuild your home is $425,000, you will be responsible for the difference. With guaranteed replacement coverage, that extra cost will be covered. With this type of policy, the only out-of-pocket expense incurred is your deductible. Some policies will even allow a small percentage for additional improvements, like adding a deck that wasn’t originally part of your home.
These types of policies are not available in all states, so check with your local insurance providers to see if guaranteed replacement cost coverage is an option.
If you own an older home or one that is historically or architecturally significant, you may need to purchase homeowners insurance that comes with modified replacement value coverage. Let’s say you own a home built in 1892 and it includes the original ornate crown molding, lath and plaster walls, and custom stained glass. Whether your home is damaged or completely destroyed, modified replacement cost value coverage focuses on functional replacement rather than precise restoration. You will only receive as much money as is necessary to rebuild or repair with current materials, including standard trim, drywall, and modern fixtures.
What is the difference between ACV and RCV coverage?
While ACV generally applies to personal property policies, RCV can apply to both homeowners insurance and personal property coverage. One big difference between the two is that ACV takes into account depreciation on lost or damaged items, while RCV does not. For policyholders looking to maximize the amount they receive when making a claim, an RCV policy may be worth a higher premium.
How does actual cash value work?
Let’s say you bought a TV two years ago for $1,000 and a recent power surge ruined it. Your personal property insurance uses actual cash value to handle claims. If your insurer determines that the TV has depreciated in value by half since you bought it, you’ll only receive $500, less any deductible.
How does replacement cost value work?
Your house catches fire and burns down. Your homeowners insurance uses RCV to settle claims and your policy has a coverage limit of $500,000. The total cost of reconstruction is estimated at $510,000. That means you’ll be responsible for the amount your coverage exceeds, in this case $10,000, as well as any policy deductible. In most cases, if you had extended replacement cost coverage or guaranteed replacement cost coverage, you would also be protected against that excess $10,000.
What is actual cash value vs. replacement cost on auto insurance?
If your car is stolen or seriously damaged or destroyed in an accident, your insurer will reimburse you for the actual cash value of your car, not the replacement cost of a new equivalent. That could leave you owing hundreds or thousands of dollars if you’ve leased or financed your new car because vehicles start to depreciate as soon as you pull them off the dealer lot. Some insurers offer auto policies that provide replacement value coverage, but a better option may be to add a gap insurance policy.
Gap insurance is designed to close the gap between what you owe on your car and what it’s worth in the event of a covered peril or risk. If you leased or financed your vehicle, made only a small down payment, or have a loan term of five years or more, it may be worth considering gap insurance.
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