Pretend, just for a moment, that a fire happened in your kitchen and your oven needed to be replaced. You have homeowners’ insurance, so you’re covered and know that everything will eventually be replaced. When you receive your reimbursement check, though, it’s smaller than you expect. You’re going to have to kick in more out of your pocket to have a stove again. After a little investigation, you discover that your policy uses the “actual cash value” of your property to calculate your reimbursement.
Property insurance claims are usually reimbursed using one of two calculations: Actual Cash Value or Replacement Cost Value. Some policies even include elements of both. Understanding the difference between these types of policies can help you with planning for recovery in case you ever need to file a claim.
Actual Cash Value (ACV): This is calculated by determining its value “new” and subtracting depreciation. This is the case regardless of how worn or pristine the item was at the time it was damaged. As indicated in the scenario at the beginning of this article, you’ll likely have to pay something more to replace what was lost. The money that you contribute to the purchase is like a deductible, if you want to look at it a different way. Monthly premiums for these policies are often noticeably lower than replacement cost value policies, though.
Replacement Cost Value (RCV): This is calculated based on the replacement cost of the property that was lost. If you had an RCV policy, the stove that went up in flames in the beginning scenario would be fully replaced without any extra “out of pocket” for you, regardless of how old the item is. Even if your stove was 10-years-old when it burned, you’d be able to replace it with a new one. As opposed to the ACV policy, there is no “deductible” equivalent. Monthly premiums for RCV policies tend to be more expensive than ACV policies.
What type of policy do I have?
You’d need to carefully read your policy, but many are actual cash value except where otherwise expressly stated. Most companies have several types of policies, including replacement cost value policies, though this may be considered an upgrade and you’ll have an increased premium price. There are some policies that also have both RCV and ACV elements. In these cases, the house is likely insured for the replacement cost value, while the property inside is insured for the actual cash value. Read your policy carefully so you know how yours works.
If you plan on upgrading from ACV to RCV, make sure you accommodated the added expense in your budget. Not sure if you should kick in the extra for the RCV? One way to figure out if it’s worth it to you is to add up a year of ACV premiums and RCV premiums and subtract the ACV from the RCV to see how much more per year you would be paying. Then consider what you think the “actual cash value” of all of the important insurable items in your home might be, like your computer, television(s), DVD and BlueRay players, surround sound, appliances, furniture, etc. Thinking about how much it would cost to replace everything with something “new”, would it be worth it to get the RCV so you wouldn’t have to deal with that? Only you have the answer for that question, but your insurance agent can help you upgrade if you need it.
Like the scenario at the beginning of this article made evident, you don’t want to be surprised by your insurance should you ever need to file a claim. How your reimbursements are calculated can affect your expectations if you are ever in this position. Though insurance won’t improve your life after a disaster, it can help you heal and replace the items that were lost.