When purchasing a homeowners’ insurance policy, there’s a lot to read and understand in order to know what you’re buying. Not only can premiums vary drastically from one insurance provider to another, so can what is, and what is not covered in the policy. If your property is lost, stolen or damaged, how reimbursement is calculated typically falls into two categories: Actual Cash Value and Replacement Cost Value. Knowing the difference can help you plan for your future and protect your assets in case disaster strikes.
Replacement Cost Value
For reimbursements based off of Replacement Cost Value (RCV), your policy would pay for the entire cost to replace your property (less any deductible), regardless of how long you’ve had it. For example, if your old, outdated television was zapped by lightning, an RCV policy would give you enough money to replace it. Since you can pretty much can only buy flatscreens now days, you’d likely receive enough money to replace your old tube TV with an similar sized flatscreen. With an RCV policy, there is no equivalent for a deductible; your insurance company will pay to replace your items less any deductible. Premiums for RCV policies are typically more costly than ACV policies, but they offer a higher level of peace of mind should anything happen.
Actual Cash Value
For reimbursements based off of Actual Cash Value (ACV), your policy would pay out for the present-day value of the item. Depreciation is factored in from the price paid for it new, regardless of the condition of the item when it was damaged. Because of the gap between the cost of a new item and ACV, you’ll likely have to pay a percentage out of pocket to replace the item. Premiums for ACV policies are typically lower than RCV policies.
Additional Important Information
Most unendorsed homeowners insurance policies provide Actual Cash Value coverage for personal property. We strongly recommend a Replacement Cost Coverage endorsement providing your home qualifies. While this results in a slightly higher premium, we believe it to be a great value and make for a much better situation should a loss occur.
How your reimbursements are calculated can make a big difference should you ever have a claim. You wouldn’t want to be surprised, expecting the policy to cover everything just to find out you’ll need to make up the difference on loss covered by an ACV policy. Whether you have an RCV or ACV policy, insurance reimbursements after a disaster aren’t meant to improve your lifestyle. Insurance is there to help you replace your stuff when you’re down on your luck. It’s intended to make you “whole” should the worst happen, so you can at least regain some of what you had before.