RCV vs ACV Insurance

RCV vs ACV Insurance: Differences & Similarities

There are several types of insurance policies for your home. The amount that you receive from a payout often depends on the kind of coverage that you choose. You can select a policy that pays for your items’ actual cash value (ACV), but depreciation can affect those values. With a replacement cost value (RCV) option, you can fully recover the costs of your damaged items. Each policy has its pros and cons. Here is what you need to know about RCV vs. ACV insurance. 

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Which Is Better ACV or Replacement Cost?

Before you purchase an insurance policy, you need to consider your specific wants and needs. In some cases, an RCV policy is more expensive than an ACV option. While an ACV option does give you adequate protection for your home, if you need something like a roof replacement, you will be paying more money out of pocket. A replacement cost policy will give you better peace of mind for those who cannot afford it, and you can recover financially after a covered loss. 

Related: Insurance 101: Actual Cash Value vs. Replacement Cost

Is RCV better than ACV? Once again, you want to consult with your insurance company or local agent. You can always get an estimate about how much you will spend when comparing an RCV vs. ACV policy. If you have many older items, they might not be covered by an actual cash value plan. Only you can decide what coverage aligns with your personal budget. Remember that a disaster can happen at any time. For example, storms can sweep through the area and damage your roof. Without the proper insurance, you could be paying for thousands of dollars in non-coverable repairs. You might have to pay more for an RCV, but there is a greater chance that all your repairs will be covered in the policy. 

two people reviewing an insurance policy

Why Is Replacement Cost Better Than Actual Cash Value?

When deciding on a policy, it can be hard to choose the right option for you. Today, replacement cost policies are more popular than the actual cash value ones. In simple terms, this policy often covers all the costs of the repairs to restore your structure back to the condition before the damage. 

For example, if you have an older roof, the policy will work to bring the structure back to the current pre-loss state. The insurance company will provide you with funds to replace or repair those items at the current prices. Actual cash value covers the present value of the item. With an older roof, you might only recover about half of the repairs costs due to depreciation. If you want the total value of your items, think about selecting an RCV policy for your home. 

Does RCV Include Labor?

In many cases, the replacement cost value will include labor costs. Labor items often do not get depreciated. However, if you have an ACV policy, labor and materials may be depreciated in the actual cash value. 

How Is ACV Calculated?

Actual cash value uses its method to value insured property. It is calculated by subtracting a depreciation amount from the replacement costs. For example, if you have a 15-year-old roof, the insurance company will not pay the total value of it. They use a formula to determine the depreciation as an actual cash value and then pay you that amount.

Related: Roof Storm Damage? 7 Signs You Need a Replacement 

Does Replacement Cost the Same as Market Value?

No, these are two different values for your home. Replacement cost is a specific amount needed to repair or rebuild your home at the current prices for labor and materials. What is an example of a replacement cost? If your roof was destroyed in a fire, the insurance company would reimburse you for the cost of the rebuild at today’s price. You may have spent $10,000 for a new roof several years ago, but the replacement cost might lower that cost to $7,000 with depreciation. 

The market value is the amount that your home is worth based on the current housing market. The location of the home, the value of the structure, and other factors determine this amount. Market value is often higher than a replacement cost. 

insurance company reviewing home information 

What Does 100% Replacement Cost Mean for Insurance?

Replacement cost value means the insurance has to pay to replace the item at the current day prices. There are a few ways to determine the value of an insured item, but in most cases, the insurance company determines how much the item was worth at the time of its pre-loss condition. When you have an insurance policy with coverage for “100% replacement costs,” you can expect to receive reimbursement for the amount of the item before the damage. In many cases, this type of coverage is known as full replacement cost coverage.

Is Personal Property Replacement Cost Worth It?

Personal property coverage will protect you financially if damage happens to your home. If you have severe roof damage and water leaks into your home, your personal property could be damaged and need to be replaced. This type of coverage can protect your furniture, electronics, and clothing. While some policies only cover the actual cash value, those higher premiums with the RCV will reimburse you for the pre-damaged costs of those items. For those with older belongings that could be subjected to depreciated values, you might want to select an RCV policy for full coverage. 

Related: What to Do if Your Roof Insurance Claim is Denied 

What Is the 80% Rule in Insurance?

You might have heard about the 80% rule. This is an unwritten rule that an insurance company will not provide complete coverage until the damage covers about 80% of the home’s total replacement value. If you want to know what your policy covers, make sure to speak to your insurance company or agent. 

The debate on RCV vs. ACV policies goes on. These policies have their advantages and disadvantages, but you need to determine which one will fit into your budget and needs. 

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