Actual Cash Value Vs. Replacement Cost

If something were to happen to your home or precious valuables, would you be able to replace or repair them? For most of us with insurance, the answer should be “yes!” But any insurance advisor should follow up with an additional query… to what extent?

Whenever you submit a personal insurance claim for a covered loss, carriers calculate your protection (or reimbursement) based on two key factors – 1) your coverage limits and 2) how they will ultimately value your insured property. Today, we’re exploring the later.

There are two primary ways carries will value your personal property after a covered damaging event – Actual Cash Value or Replacement Cost Value.

What is Actual Cash Value (ACV)?

This is not based on market value. Rather, a typical formula looks something like this – the Replacement Cost MINUS Depreciation (according to an insurance carrier’s formula) EQUALS Actual Cash Value. For example, if a refrigerator is 10 years old, how much would it be worth today, 10 years after its creation?

In the event of a total loss, Actual Cash Value is never enough to rebuild your house as it was before.

What is Replacement Cost Value (RCV)?

Time and use can dramatically depreciate the value of assets, so Replacement Cost requires the insurance company to help rebuild/replace your assets based on what they cost to replace “today,” regardless of depreciation. Replacement Cost 40-50% more coverage and typically costs more for this reason.

Which One is Better?

When you own high value assets, you won’t want depreciation to be calculated into the equation if a damaging event occurs. This could be much more costly in the moment than a relatively small difference in premium. As you are evaluating your personal belongings, try to weigh the benefit of coverage vs. premium. If you still have warranty on your important belongings, or you have not yet built a valuable collection of personal property, Actual Cash Value may be just the coverage you need. But every situation is different and ultimately, you need to be confident in your insurance coverage. If you’re uncertain about investing in Actual Cash Value or Replacement Cost Value, always reach out to one of our friendly experts.