This post is my first in a series where I address common FAQs about Homeowner’s Insurance. After the many changes insurance companies have implemented to home insurance recently, this leaves many consumers confused and very unsure of what exactly they are covered for. This series is aimed at addressing the important parts of your home insurance policy and what kind of questions you should be asking your agent.
This week I am discussing the differences between Replacement Cost (RCV) and Actual Cash Value (ACV) on your insurance policy. In order to understand what the difference is between RCV and ACV, we need to understand what exactly each of these terms mean.
Actual Cash Value = Replacement Cost – Depreciation.
Replacement Cost is the actual cost in today’s dollars to repair or replace an item back to it’s pre-loss condition.
Depreciation is the deduction based on the age and useful life of that item.
So what does all this mean to a homeowner? This means that if you have an Actual Cash Value policy and you have a claim, you might not receive enough money from the insurance company to adequately replace your property.
You have a fire loss at your home that was built in 1970. To repair the damages to get your house back to where it was before the fire, it is going to cost $100,000. The insurance company determines $40,000 in depreciation.
If you have a policy with Replacement Cost, the insurance company would pay out the $100,000 worth of damages to repair the house back to it’s original condition.
If you have a policy with Actual Cash Value, the insurance company would subtract the $40,000 in depreciation from the Replacement Cost and you would be compensated $60,000 for the damages. The homeowner would be responsible for the additional $40,000 to repair their home.
So why would anybody ever choose to have a policy with Actual Cash Value instead of Replacement Cost? The truth is, a policy with Actual Cash Value is cheaper than a policy with Replacement Cost. But with the potential to be out thousands of dollars after a claim, I always advise my clients to choose a policy with Replacement Cost.
Contact me today for a free evaluation of your current insurance policy and make sure you have the right coverage!