When you are deciding on a homeowners’ insurance policy, there’s a lot to learn to understand what you’re really buying. Though people often look closely at premiums, there can also be differences in what is and what isn’t covered by the policy and how reimbursements will be calculated. Reimbursement calculations typically fall into two categories: Actual Cash Value and Replacement Cost Value. The differences between them can be pretty significant and understanding how they both work can help you protect your assets in case disaster strikes.
Actual Cash Value vs. Replacement Cost Value
Actual Cash Value (ACV) policies pay for the current value of the item insured, considering depreciation into the amount of the loss. Depreciation is considered regardless of the condition of the property at the time it was damaged. Because of this, there will likely be a gap between the price of a new version of the item and the “actual cash value” of the item. That means you will likely need to pay some money out of pocket to replace it. The difference that you have to pay, between what the insurance company gives you and the true cost to replace it, is in addition to any deductible you might have as well. Because of this, premiums for ACV policies are usually lower than Replacement Cost policies.
Replacement Cost Value (RCV), on the other hand, evaluates the value of your items based on the cost to replace it, regardless of how old it is. For example, if your 5-year-old television was zapped by lightning, your policy would pay out enough to replace it with a current model of the same size and quality. Opposed to the ACV policy, with an RCV, there is no deduction for depreciation, and therefore your items can be replaced at no significant additional cost beyond your deductible. Because of this, premiums for RCV policies normally cost more than ACV policies. Depending on what your priorities are for replacing your stuff should something happen, the extra premiums may be worth the peace of mind RCVs offer.
Additional Important Information
The majority of unendorsed homeowners’ insurance policies only provide for Actual Cash Value coverage on your personal property. However, most all insurance providers offer the option to upgrade an ACV policy to an RCV policy. While your premiums will be slightly higher, we strongly recommend this coverage.
As you can see, having Replacement Cost Coverage on your personal property can make a big difference should you ever have a claim. Knowing this, before you choose a policy, can make a big difference in your future experience. After all, you wouldn’t want to be surprised after a catastrophe strikes, expecting the policy to cover all costs just to find out it doesn’t.
If you have questions about what coverage is right for you, feel free to stop by our office located at 6230 10th Street N, #430 in Oakdale, MN 55128-4108 or call to discuss any concerns by phone (651) 739-9302.