Cash Battle: Actual Value vs. Replacement Cost

Cash Battle: Actual Value vs. Replacement Cost

Understanding homeowners insurance can be confusingly difficult, especially when explained in complicated jargon. There are a couple important terms, however, that should be thoroughly explained and compared when dealing with property insurance. Two often misunderstood terms, which we’ll seek to clarify, are Replacement Cost Value (RCV) and Actual Cost Value (ACV) of property insurance.

What is RCV?

Replacement Cost Value simply means the cost of the property in regards to the value of the property’s material and the quality of the home. It is typically defined in the home insurance policy.

RCV is automatically applied to the insurance policy unless the limit of insurance or the actual cost spent on repairing or replacing the property is less than the damaged costs. This is a broad definition, however, and you are encouraged to refer to your insurance policy for the exact perimeters.

What is ACV?

Actual Cost Value is more complex than RCV. While many insurance policies vary on the exact definition, it is widely interpreted as a term meaning “fair market value,” or the amount a buyer would pay if time constraints weren’t a factor. Another broad consideration of the term is the cost to replace with new property of equal or better value, unless the property has deteriorated as a result of the passage of time.

Though the definitions of the terms are rather similar, they each have a drastically different impact on home insurance policies. Perhaps the best way to describe the term’s differences is through the example of a common scenario.

RCV Scenario

Let’s pretend that your 1980’s home was damaged in a fire that caused $100,000 in damages. Your insurance policy deducts $20,000 in “wear and tear” damages (the cost of depreciation), leaving an actual cost value of $80,000.

Because you have an RCV Insurance Policy, you would only be able to recover the $20,000 deprecation amount if you incurred the RCV expense rather than the ACV amount. After incurring the RCV cost, be ready to provide any and all additional documentation that your insurance company may potentially need. Receipts, invoices, inspection notices, etc., may all be required by your insurance before being allotted the cost value expenses.

ACV Scenario

With the same situation in mind, let’s consider the impact of ACV on insurance policies. Remember, your 1980’s home burnt down and a $20,000 deprecation cost has been deducted from the original $100,000 RCV amount. This leaves an $80,000 ACV remaining.

If you have an ACV insurance policy, you would receive $80,000 in loss coverage costs, but you would NOT receive any of the $20,000 in RCV costs. Though premiums are lower on ACV insurance policies, there is a chance you may have to pay a significant amount of personal money in the event of a home loss.

The two are obviously different, but neither ACV nor RCV is perfect for everyone. In order to choose the proper insurance policy that best meets your needs, it’s helpful to review the positives and negatives of each value.

ACV Pros and Cons

Pros: With an ACV insurance policy, homeowners can feel secure knowing their home will be partly covered in the event of a fire, flood or tornado. ACV policies are also cheaper than RCV Insurance policies.

Cons: As mentioned previously, ACV policies can be incredibly detrimental to personal funds if the loss of your property is severe. Because you would NOT be compensated for the deprecated amount, you risk paying a significant amount of money out of your own pocket to finalize the recovery of your home.

RCV Pros and Cons

Pros: The RCV is an accurate way of valuing your property in the event of loss. Depending on your policies limitations, there are a few times when RCV may be more affordable and tend to have a lower insurance premium than ACV policies.

Cons: Because RCV policies pay out more in the event of a claim, they almost always come with higher premiums. Insurance companies also require thorough, proper documentation in order to release you funds.

If you are interested in enrolling in one of these property insurance policies, contact the Taylor-Moore Insurance Agency. Associates at Taylor-Moore can also answer any questions, concerns or further inquiries you may have.

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