Will your insurance policy pay enough for the replacement of your property?
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Actual cash value is a method insurance companies use to assign value to the property they insure. Sometimes referred to as “ACV,” actual cash value is equal to the replacement cost of your property minus depreciation.
If your property is insured at actual cash value, then a payout for its replacement could be considerably less than the price you paid for it. The term is commonly used in home, renters, and auto insurance, which we’ll explore in more detail below.
Actual cash value is a common way of assigning value to your property. As mentioned above, your insurer factors in age and wear-and-tear to come up with a number that can be far less than the cost to fully replace the item. Replacement cost value, on the other hand, pays the full amount required to cover your loss without depreciation being factored in. Replacement cost value will cover the full value of your car, home, or personal property without any deduction for its condition.
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 also 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.
Choosing ACV or RCV can have a large impact on how well you’re protected. It’s important to keep this in mind when choosing your homeowners insurance coverage. Here is a rundown of the valuations offered by different homeowners policy types:
Most people are aware of how quickly a new car depreciates. Essentially, the moment you drive your new vehicle off the lot, its value goes down. 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.
Keep in mind that in many cases this won’t be enough to cover the full cost of a new car of the same value. Worse, if you are financing a car, this could leave you upside down on payments, meaning that you owe more than the car is actually worth. To avoid this situation, you could add gap insurance. Gap insurance covers the difference between what you owe and the actual cash value of your car.
Some car insurance companies offer what’s called new car replacement coverage. However, most insurance companies have strict requirements in order to be eligible, including carrying full coverage on a car that is newer. There are typically age or mileage limits for this coverage.
You can think of a renters policy as a homeowners policy without the dwelling coverage. In this regard, your personal belongings are covered in much the same way. Most renters policies are likely to protect your personal belongings at replacement cost value, though actual cash value options are commonly available. If you own higher-value items, you can still add an endorsement to cover specific items such as jewelry or artwork.
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.
When you are shopping for an insurance policy, the cost is likely on your mind. With actual cash value, the amount of money that you pay on home or auto insurance premiums will be lower. However, keep in mind that your payout may not be enough to fully replace your property. Still, ACV can be a great option for vehicles that are slightly older for personal belongings that are not as valuable.
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.