What is the difference between Actual Cash Value (ACV) and Replacement Cost (RC)?
Both these terms refer to the way a Home Insurance company will pay a claim. Did you ever wonder what Actual Cash Value means and how it will affect the payment of your claim? Is it better or worse having Replacement Cost on your policy? Does it impact the price you pay for home insurance? We're going to answer those questions in this blog. Let's start with damage to Personal Property.
As an example of a personal property loss, let's say that a bunch of kids broke into your home while you were on vacation. For no reason at all, they decide to spray paint your leather couch. This couch costs you $3000 when you purchased it 3 years ago. You can't repair it. The couch is a total loss.
What is Replacement Cost on a Home Insurance policy?
Replacement Cost pays you the cost to replace your property today without depreciation. For example, you place a claim with your insurance company for the damage couch mentioned earlier. A similar couch today costs $3250. The Insurance Company checks your policy. They confirm that you have Replacement Cost on your Contents (RCC). They send you a check for $3250 minus your deductible.
What is Actual Cash Value on a Home Insurance Policy?
Actual Cash Value pays you the cost of replacing your property minus depreciation. For example, You place this same claim with your insurance company. They check your policy and determine you have Actual Cash Value (ACV) on your contents. They use a formula to determine that your 3 year old couch is worth $2000 today. They send you a check for $2000 minus your deductible.
How does ACV and RC affect what I pay for Insurance?
As you might imagine, you'll pay more for Replacement Cost than Actual Cash Value. How much? It depends on how much Property you insure. It can range from a hundred dollars a year up to a thousand or more for a larger home. Many of our customers choose ACV to make their policy more affordable, however we always recommend you get Replacement Cost on your policy. We've shown how depreciation affects your claim payment for a single leather couch. Imagine what it would do to an entire household full of personal property?!
Does ACV and RC affect the Building Coverage on my Policy?
Yes, ACV and RC work the same way with Building coverage on a Home policy. But most modern Home Insurance policies come with Replacement Cost included for buildings. Some landlord policies (DP) and Commercial policies still offer ACV. But these are the exception, not the rule. It's always best to check with your agent.
Which is better: Actual Cash Value or Replacement Cost?
Replacement Cost is always better coverage, but costs a little more. If you're trying to make your policy more affordable, opt for Actual Cash Value, but keep in mind that these savings might cost you at claim time.