Out of all of the types of insurance, you may need to purchase in your life, homeowner’s insurance is undoubtedly one of the most important.
Around 95 percent of homeowners have homeowner’s insurance, representing over 70 million homes insured across the country. While many landlords require renter’s insurance, there is no legal requirement for homeowners to ensure their dwellings. However, most mortgage companies insist their clients purchase insurance for their homes.
While insurance is a vital component of homeownership, the terminology and practices surrounding homeowner’s insurance can be confusing. One aspect of homeowner’s insurance that can be really confusing regards reimbursement.
Replacement cost and actual cash value both refer to how your policy reimburses you for property damage. But, what’s the difference between actual cash value (ACV) vs. replacement cost? (RCV) Read on to find out.
What is the difference between ACV and RCV?
First things first, how does ACV differ from RCV? Let’s take a look:
Actual Cash Value
If you have actual cash value coverage, it means that your insurance company agrees to pay you for the value of your property in its current state. To figure out how much they owe you, the insurance company will take the replacement cost of your belongings and reduce the amount due to depreciation.
For example, if there was damage to your roof due to a storm, an actual cash value coverage policy will reimburse you for the roof’s depreciated value. With depreciation factored in, the reimbursement may be less than the cost to purchase a new roof.
Replacement Cost Value
With replacement cost value, your policy allows you to repair or replace your damaged property by making your depreciation recoverable without factoring in depreciation. For example, if your kitchen was damaged in a fire, RCV may help you pay to replace damaged items with items of similar quality and value.
What is the primary difference between replacement cost coverage and actual cash value coverage?
The main difference between replacement cost coverage and actual cost coverage lies in depreciation. Depreciation refers to the process in which assets lose value over time. Cars, homes, and computers are just a few things that may depreciate in value over time.
With replacement cost coverage, the depreciation is recoverable once the work has been completed depreciation is not taken into account, whereas the actual cash value of the depreciation amounts are non-recoverable coverage takes it into account.
What is better, actual cash value or replacement cost?
So, what type of homeowner’s insurance is better? While replacement cost coverage pays more for damage to your home, you’ll be paying more in monthly premiums.
While actual cash value insurance offers a lower payout, you’ll benefit from lower monthly premiums. Objectively speaking, one type of insurance isn’t better than the other – it all depends on your home, your stuff, and your financial situation.
However, in most cases, replacement cost insurance is the better option, as you’ll be able to replace your home and its belongings without having to dip into your own funds. If you don’t have a lot of savings or you’re in debt, this can be a huge relief should you experience property damage.
In some cases, mortgage companies require homeowners to carry replacement insurance so they can be certain you’ll keep up with your payments should disaster strike. While higher premiums can be a pain, you can have peace of mind knowing you won’t be sent deeper into debt if there’s damage to your property.
However, this doesn’t mean you should rule out actual cash value insurance completely, as for many people, it’s the better option. If you have a lot of money saved or a fair amount of assets, you may decide that it’s better to take the chance of needing to dip into your own money so you can avoid high monthly premiums.
If you own a vacation home or second home, actual cash value insurance can be an attractive option, as you’ll still have your primary home to live in while you save for repairs.
What does actual cash value mean in insurance?
So, what does the term “actual cash value” actually mean? Actual cash value refers to the equation used to determine the value of something by figuring out the cost to replace an item and reducing the cost of depreciation.
For example, let’s say you need to replace a damaged roof that has a replacement value of $25,000. With an actual cash value policy, your insurance company will determine how much depreciation has occurred by looking at various factors such as the age of the roof, the materials used, the roof’s average lifespan, and the standard depreciation rate set by Xactimate software.
If the insurance company determines the roof depreciated by $15,000, they will withhold that amount as well as your deductible amount in their payout; they’ll provide you with $10,000 to replace your roof.
Do you need to hire someone to inspect your damaged roof? Check out Advanced Consulting’s services to learn more!
What does full replacement cost mean?
With full replacement cost, depreciation is recoverable once the work has been completed. depreciation isn’t factored in at all. This means that if your insurance company determines the value of your roof is $25,000, you’ll get $25,000 to replace it.
Do insurance companies pay ACV or RCV?
With ACV, your insurance company will pay the depreciated amount for some dollar amount that’s less than the total replacement cost of your property. For example, if there’s damage to your stove and it costs $4,000 to replace it, the insurance company will the actual cash value minus your deductible only, and the depreciated amount will be non-recoverable. pay some amount less than that due to depreciation.
If you possess RCV coverage, your insurance company will cover the full replacement cost.
Insurance 101: Time to Decide
Now that you know the difference between ACV and RCV, it’s time to decide which type of policy is right for you. Once you’ve signed up for the right insurance, you need to focus on fixing your damaged property.
If you’re looking to replace or repair a damaged roof, contact our team at Advanced Consulting to learn more about roof repair!