What's the Difference?Actual Cash Value (ACV)The amount of money needed to fix your home, minus the decrease in value of your property because of age or use. This is also called Depreciated Cash Value. Show
Replacement Cost Value (RCV)The amount of money needed to repair your home at today's prices of building supplies; or replace your belongings at today's cost of the similar or like item. It is important to discuss replacement cost with your insurance agent when purchasing your policy. How Replacement Cost WorksGenerally, if you have Replacement Cost Coverage, the insurance company may first pay you the actual cash value. Once the item is repaired/replaced and receipt(s) submitted, the company will reimburse you the extra money you paid to replace/repair the item. This is called "Recoverable Depreciation." It is important to know how your policy will pay replacement cost. There are three ways to calculate the amount of protection your renters or homeowners insurance will provide: actual cash value (ACV), replacement cost value (RCV) and extended replacement cost value. Most insurers offer all three options for policyholders to choose from. While replacement cost value policies are the most popular, understanding each option will help you choose the right balance of cost and protection for your coverage. What is actual cash value coverage?With actual cash value, your home's value is calculated in one of two ways:
Most standard homeowners insurance policies include coverage for the actual cash value of the insured’s personal property, as well as the replacement cost of your home's physical structure. An insurance policy with coverage based on actual cash value will be the least expensive to purchase since depreciation is factored into the value of your home, and therefore the payments you receive for a claim are generally lower. How is depreciation calculated?Each home insurance company may calculate depreciation differently. A common method for determining depreciation takes into account an expected lifetime of an item, then subtracts a percentage of value for each year since its purchase. For example, let's say you bought a $1,000 T.V. four years ago, and it's expected to last 10 years. The estimated straight-line depreciation calculation would calculate the annual loss of value like this:
As you can see, using actual cash value means that the insurance coverage for most of your personal belongings will decrease over the number of years you own them. What is replacement cost value coverage?Sometimes called "RCV", replacement cost value covers the amount of money it would take to replace your current home — if damaged or destroyed — with the exact same home or a similar home in today's market. The replacement cost is usually calculated in one of the two following ways: The total, initial price tag paid for all items The cost of physically building the home when it was purchased Some home insurance policies and endorsements also include coverage for replacing personal property that is damaged or destroyed, however RVC does not cover the value of the land your property is located on. For example, say you purchased a new home for $350,000. That price likely included the cost of the lot it was built on and the cost of constructing the dwelling. If the lot was priced at $50,000 you only need to insure the cost of the home, which would be $300,000. Replacement cost value is the most recommended coverage option, since it can help policyholders secure a living situation that closely resembles their previous home. It's generally recommended that you get a contractor or appraiser to evaluate your house's replacement cost. They'll know how to price the cost of the building's construction materials (like granite, windows, or doors), any unique or valuable upgrades or additions, and determine your house's fundamental value. Sometimes the replacement cost is paid in two installments. First, the insurer will pay either the actual cash value or half of the replacement cost. Then, once repairs have been made and you can send documentation to the insurer, they will pay the remaining amount. Guaranteed or extended replacement costPolicies with guaranteed or extended replacement cost coverage offer the most costly but extensive protection. This coverage is essentially an expanded version of RCV coverage, but it also pays the cost to rebuild your home exactly as it was before a peril, even if the cost exceeds the estimated value of the home. One major advantage is that, unlike regular RCV coverage, extended replacement cost coverage protects you against increases in materials or construction costs, which often happens after a disaster strikes many homes in one area. If you live in an area prone to natural disasters, and your budget allows it, extended replacement cost insurance is a good option. Another coverage option to consider is an extended replacement policy, which covers you for an additional 20% to 25% more than the replacement value of the home. Which is better replacement cost or actual cash value?Replacement cost also provides extra protection above the policy's limit against material and labor cost increases. Therefore, replacement cost is a better homeowner insurance coverage option than the actual cash value because it restores the policyholder's situation to what it was before the covered loss occurred.
Whats the difference between an actual cash value policy and a replacement value policy?While both types of coverage help with the costs of rebuilding your home or replacing damaged items after a covered loss, actual cash value policies are based on the items' depreciated value while replacement cost coverage does not account for depreciation.
Is RCV or ACV better?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.
What is a replacement value policy?Replacement value is a method for determining what an insurance company will pay you in case your property is stolen or destroyed. It equals the cost of replacing the property.
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