When purchasing homeowner insurance, some of the most important things you need to understand are the types of coverage you are purchasing and how your property and possessions are valued. Is your home covered with Replacement Cost or Actual Cash Value? What does that even mean? What is the difference between actual cash value and replacement cost coverage?
Replacement Cost Coverage (RC)– Home insurance with replacement cost coverage typically covers the repair or replacement of your damaged property due to a covered loss without depreciation deducted, subject to policy limits and deductibles.
Actual Cash Value Coverage (ACV) – A home insurance policy with actual cash value coverage generally covers the repair or replacement of your damaged property due to a covered loss – BUT the amount of deterioration, depreciation, and obsolescence (e.g. wear and tear, age, etc.) is deducted from the value, subject to policy limits and deductibles. While the premium for an ACV policy is usually less than a replacement cost policy, the amount you would pay out of pocket in the event of a loss could be much more.
It’s very important to know what type of policy you have so you can adjust if necessary. Imagine your surprise after your home is burglarized, and you find out you will not be reimbursed enough to replace all your belongings that were stolen or damaged. Or your home is severely damaged during a recent storm, and you must pay, not only your deductible, but out-of-pocket for a portion of the damages. So…how do you prevent from being in this unexpected situation? Educate yourself on the type of coverage your homeowners insurance policy provides and fine-tune if needed.
How do I know if I need replacement cost or actual cash value home insurance coverage?
When getting a quote, your agent will ask you questions about the construction of your home as well as other features. This information is then entered into a valuation tool to determine the value of your home. Once the value is determined, your agent can assist you in determining the type of coverage that best fits your needs.
Another thing to consider is which coverage applies to your home and personal property – pay close attention because these may not be the same. For instance, your home may be covered at replacement cost and your personal property at ACV.
Additionally, your policy may also have endorsements that change the coverage provided by the policy. For example, your policy is replacement cost and has an endorsement which changes the coverage of your roof to actual cash value. Talk to your agent about the details of your coverage for your home and personal property to avoid any surprises. Whether your policy is actual cash value or replacement cost, your claim settlement is subject to the policy limits and deductibles.
Basics of Actual Cash Value
As mentioned above, actual cash value is the amount it would cost to repair or replace covered property, at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation, and obsolescence. Actual cash value is generally less than what you paid for an item.
Example of Actual Cash Value: You lose a two-year-old laptop in a covered loss, like a fire. At the time of the loss, the cost to replace your laptop with like kind and quality is $500. After applying depreciation, you may only get back around $300. Of course, the depreciation amount may vary based on item, price and age.
Actual cash value may provide you with a lower premium, but it is almost always going to provide you with a lower payout, too. Things depreciate and lose value over time, and ACV accounts for this.
Basics of Replacement Cost
Since replacement cost is the amount of money it would take to repair or replace your covered property exactly the way it was before it was stolen or damaged by a covered loss, this type of coverage gets homeowners closest to their living situation before the unexpected happened. Always talk with your agent about what coverage you have.
Example of Replacement Cost: It cost you $100,000 to build your home 10 years ago. After a tornado destroys your home, you need to rebuild completely. Construction prices are higher than they were 10 years ago, and it will cost $120,000 to rebuild your home the same way it was before. Replacement cost coverage would account for that and pay you the current cost to rebuild (subject to policy limits and deductibles, of course).
Replacement cost options usually lend to a higher premium, but you will likely come out better on the other side if you suffer a total loss.
You have options when it comes to your homeowners insurance coverage. Talking with your agent is the best way to understanding your policy coverage options, and what you can do to make sure you’re in the best situation should tragedy strike. Having a yearly review of your policies is always a great idea! This provides you the opportunity to discuss any changes that have been made to your property or other important updates that may impact your insurance needs. Contact your agent today to schedule an appointment to review your insurance portfolio.