Which coverage option offers the most protection?
Just because your belongings are insured doesn’t mean an insurer will pay you the full price it costs to replace the items. Actual cash value and replacement cost value are methods that insurance companies use to assign value to the property. In short, actual cash value (ACV) reimburses you for what your belongings are currently worth (depreciation included). Replacement cost value (RCV), on the other hand, pays the full value of replacement.
It’s important to find out whether your policy replaces your belongings at actual cash value or replacement cost value, be it homeowners, auto, or otherwise. The cost and breadth of coverage each provides can vary greatly.
Should you choose ACV or RCV? The answer may depend on the sort of property that you own and how much you are willing to spend on your premiums. Read on to find out more about ACV and RCV and which one could be best for you.
Below you'll find a general description of both actual cash value and replacement cost value.
Actual cash value insurance reimburses you for lost property with depreciation in mind. It looks at replacement cost and subtracts for the age and overall wear and tear of the property. As such, it is not likely to fully replace your home, vehicle, or other belongings. For instance, if your couch is damaged in a small house fire, actual cash value not give you the full amount to replace the item.
If you're insuring less expensive items, actual cash value might be worth considering. Items requiring more money to replace are better-protected by replacement cost value.
To calculate the actual cash value of your property, your insurance company looks at its age and its expected lifetime, factoring in depreciation for wear-and-tear. In some cases, the company looks at similar items and what they cost to replace in your area. Once they have determined the percentage of life that remains in your item, they multiply that number by the amount it would cost to fully replace it, giving you your ACV.
Replacement value insurance does not factor in depreciation. It pays to replace your property at full cost, minus your deductible. This means that you can replace your property with that of similar kind and quality to that which you lost.
For instance, if your covered television is stolen, replacement value insurance will pay the full price of a new one with similar specs. That said, going back to the “similar kind and quality” clause, it will not replace your television with one that is larger or has a higher resolution. This level of coverage is recommended for homeowners, at least for the primary dwelling.
A house is the biggest purchase most people make. Keeping it properly insured is the best way to protect your investment. Most homeowners insurance policies value your dwelling at replacement value. However, actual cash value is used in many aspects of home insurance, primarily relating to your personal property.
Your dwelling includes the main structure of your home and any attached structures like a fence or a connected garage. Other than your personal liability, it is the part of your homeowners coverage with the highest limits as it is the most expensive to rebuild or replace. Insuring your primary dwelling at actual cash value is not wise in most cases, as it will unlikely leave you with enough money to replace or repair your home to the same standard.
The exception typically comes with older homes. Those with historic significance or special architectural features could cost far more to replace than the market value of the home. This is because of the types of materials and specialized labor required to reconstruct them to the prior standard. In this case, actual cash value could be a good idea. If your home falls into this category, consider an HO-8 (modified) home policy.
Your personal belongings are assigned a payout value as well. In almost all policy forms this is assigned as ACV. For example, if your five-year-old television is damaged, destroyed, or stolen, your insurance company won’t pay the full price for a new item unless it is insured with replacement cost coverage. However, a more robust HO-5 homeowners policy will typically cover your belongings at replacement cost.
The table below has more details about policy types and their typical payout method.
If you choose a homeowners policy with less coverage — like an HO-1 or HO-8 policy— you may not have enough coverage to fully replace your dwelling to its previous standard. As such, it's highly recommended that homeowners insure their homes with an HO-3 or HO-5 policy.
While replacement cost coverage is far more robust than actual cash value, it can come up short in some cases, as it only covers your house up to a certain monetary limit. For instance, a home valued at $225,000 could cost $250,000 to replace to the same standard. This increase in cost can be attributed to increases in the cost of labor, building materials, or a number of other factors.
Extended replacement cost coverage goes a step further to protect your home. Your coverage will extend up to a certain percentage beyond your home’s value: usually between 10% and 25%. This is meant to offset unforeseen costs that could keep you from rebuilding your home to its pre-loss standard.
Because you're getting coverage beyond the value of your home, you can expect to pay a higher premium for extended replacement cost coverage. How much a replacement cost coverage add-on costs depends on a number of factors. Everything from the value of your home to your credit score can influence your rates. If you're faced with a catastrophic loss, knowing you'll be able to rebuild hassle-free may make the added cost worthwhile.
The moment you drive your new vehicle off the lot, its value decreases. This new, lower value is the actual cash value. If your car is deemed a total loss, the actual cash value is what your payout would be. Standard car insurance policies offer coverage at actual cash value, or what your insurance company considers the car to be worth factoring in depreciation.
Insurers don’t consult common value guides like the Kelley Blue Book, so your payout may not match numbers that you have researched. Each insurance company has its own methods of determining your vehicle’s actual cash value and will pay out accordingly. For instance, if you bought a new car five years ago, this coverage would not pay out the amount to purchase a new car: it will only pay the current value of your five-year-old vehicle, with depreciation subtracted.
Replacement cost coverage can, however, be added to some auto insurance policies through a new car replacement endorsement. This coverage will replace your car with the same model if it is deemed a total loss. Bear in mind that not every insurer offers this coverage. Those who do will insist that certain requirements be met in order to qualify. For instance, your car must be newer (falling under the insurer's mileage limits) and you must carry physical coverage such as comprehensive and collision insurance.
If you have a modified or classic car, you may want to look into a different method of valuation, such as stated value or agreed value. The true value of such items can be harder to determine and is often far more than the actual cash value. Coverage amounts and values can usually be found on your policy’s declaration page.
If you have renters insurance, your belongings are covered in case of a loss. However, to what degree the insurer will cover your losses depends on your level of coverage. In the event of a loss, RCV coverage will go much further in helping you get back on your feet, paying out the full cost to replace listed items. Renters insurance policies are often affordable, with the difference between actual cash value and replacement value being marginal, making RCV a smart and affordable option. If you own higher-value items, you can add an endorsement to cover belongings like jewelry or valuable musical instruments.
Unsurprisingly, replacement value coverage is better in the event of a loss. If you're looking for added peace of mind that your personal property will be fully covered, RCV is the way to go. However, you will pay more for this type of coverage through higher rates. For some items, it may not be necessary to incur the extra premium costs. For other items — such as your primary dwelling — replacement value coverage is highly recommended. Your coverage level will ultimately come down to your individual priorities and financial situation.
Policyholders should know exactly what their insurance will cover and what they won’t. Make sure to check your current policy documents or to contact your insurance agent about the value amount of your property. If you are worried about the cost of increasing your coverage, The Zebra can assist. We help you find insurance quotes from top companies, allowing you to choose the policy that is the best fit for you.