Homeowners Insurance Difference between Replacement Cost and Actual Cash value Acv

Before you sign on the dotted line, take another look at your insurance policy and why its premiums are so low. Does it cover the replacement cost of your valuables, or does it cover the actual cash value of your valuables? This is where many basic rock-bottom insurance policies cut corners.

Replacement cost (RC) coverage will pay for replacement of all covered items which were damaged or lost. This usually means assessing the cash value of the damaged item based on a new item of comparable kind and quality, using current market prices.

With replacement cost coverage, there is never any deduction for depreciation, no matter how old the item was. This does mean that a 5-year-old electronic device would be replaced with enough money to buy a new electronic device of comparable quality.

Actual cash value (ACV) coverage will only pay for the depreciated value of your lost or damaged items, based on their age and condition just before the loss or damage. Depreciation is calculated based on the replacement cost of the item.

The car insurance industry often uses ACV coverage. This can mean that after you total your car, the check you receive from the insurance company is less than what you still owe on your car.

The depreciated value of your lost or damaged item is not the same as its resale value would have been. Depreciation is usually calculated as a steady curve or straight line percentage, which, over time, brings the item’s value to $0. However, resale value may plummet initially, then drop steadily at a slower rate. Just driving a car off the lot often halves its resale value, but its depreciated value may only have fallen by 10%, depending on how depreciation is calculated.

However, sometimes the only way to calculate the actual cash value is to use its resale value. For example, houses don’t depreciate the same way most other items do. If a homeowner’s insurance policy covers a house at its actual cash value, it would cover the house at its current market value before disaster hit. This is usually much less than what it would cost to rebuilt.

Actual cash value coverage is common in the service industry. If a piece of clothing is lost during dry cleaning, the dry cleaner’s insurance will only cover a maximum of half its original or replacement value, usually much less. For the same reason, airline lost luggage is often covered to a maximum of $100 per bag. The clothes may cost much more to replace, but their actual cash value is minimal.

Most homeowner’s insurance covers the replacement cost of your home and its contents. However, some policies cut corners by covering the replacement cost of your home, but only the actual cash value of its contents. In a typical house, this difference can make a difference of over $100,000. Even in replacing appliances alone, the difference can quickly add up.