As an auto or home policyholder, many of us forgo reading the fine print when it comes to our policies. We rely on our independent agent to help us choose the right coverage based on our needs. However, as you meet with your agent, you may want to discuss what your current policy covers so you are not surprised if you file a claim.
Learn the difference between actual cash value and replacement cost to make sure your home insurance or auto insurance policies reflect the way you want personal property replacement handled in the event of a claim. We’ll cover the pros and cons of each so you can tell your independent agent exactly what you’re looking for.
Actual Cash Value
What does actual cash value (ACV) mean?
Actual cash value is the cost to replace or repair an item that is accidently damaged, destroyed or stolen, minus depreciation. Depreciation accounts for normal wear and tear of an item over time. To calculate actual cash value, you’ll follow this equation:
Cost Brand New – Depreciation = Actual Cash Value
We’ll use an example scenario to help paint the picture. Let’s say in 2019 you bought a brand new Toyota Camry for $26,000. Fast-forward to today, you are in an auto accident and your car is completely totaled. You file a claim with your insurance company and they decide your car is a complete loss (you can’t drive it and it can’t be salvaged). Under your insurance policy with actual cash value coverage, the insurance company offers you a settlement of $12,300, which covers the cost of what the vehicle was worth prior to the accident. Keep in mind, this total is what is left after you’ve met your deductible.
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Why are auto policies typically ACV?
You’ll find actual cash value is common in auto insurance policies because a vehicle’s value and condition depreciates quickly. Like the saying goes, your car loses value when you drive it off the lot. According to Lending Tree, your brand new car can depreciate as much as 20% in the first year you own it.
The pros and cons of actual cash value
Actual cash value is not a one-size-fits-all approach. You may prefer actual cash value in some of your insurance policies, but not all. Here are some pros and cons to help you weigh your options:
Pros
- May cover assets that appreciate value, such as artwork.
- May cover assets that are newer and have not yet lost value, such as a living room couch you purchased a few months ago.
- May be a lower out-of-pocket premium than replacement cost policies.
Cons
- Will likely not cover your total original investment, especially those lost that depreciate quickly like electronics.
- For some insurance coverage, like an auto policy, actual cash value is your only option.
Replacement Cost
What does replacement cost mean?
Replacement cost is the price to replace or repair an item that is accidently damaged, destroyed or stolen, at what it costs to replace today. Depreciation is not a factor. To calculate replacement cost, you’ll follow this equation:
Cost Brand New = Replacement Cost
Let’s use another scenario as an example. In this instance, you just got back to your home after a weekend away. You discover your home was burglarized and your two upholstered chairs were stolen. You file a claim with your insurance company and because you have replacement cost on your homeowners insurance policy, you have coverage up to the cost to replace the chairs today.
The pros and cons of replacement cost
Getting equal or better (newer) replacements for your lost personal property can sometimes make the loss easier to swallow. However, there are limitations for replacement cost claims. Here are some of the pros and cons:
Pros
- May be applied to your home if it’s a covered peril.
- May be applied to your personal belongings if they are covered perils.
Cons
- Is restricted to the coverage limits on your policy.
- Is restricted by types of coverages within your policy, such as dwelling replacement cost.
- May be a higher out-of-pocket premium than actual cash value policies.
- May be paid out as actual cash value until the item is replaced. Then, a second payment with the depreciation value will follow.
Ask your independent agent for more help
Actual cash value and replacement cost can get a bit confusing, but your independent agent will know what is best for you. Call your Integrity Independent Agent today to review your auto and home policies.
References
LendingTree
Investopedia
Bankrate
Coverages described herein may not be available in all states. Please contact a local independent Integrity agent for complete details on coverages and discounts. If the policy coverage descriptions herein conflict with the language in the policy, the language in the policy applies. For the coverage to apply, a claim must be made and reported during the policy period. Scenarios above are not actual claims. The material provided above is for informational, educational, or suggestion purposes and does not imply coverage. WE RESERVE THE RIGHT TO REFUSE TO QUOTE ANY INDIVIDUAL PREMIUM RATE FOR THE INSURANCE HEREIN ADVERTISED. Integrity Insurance policies are underwritten by Integrity Insurance Company, an affiliate of Grange Insurance Company, and Integrity’s subsidiaries. Integrity companies not licensed in Pennsylvania. Not all Integrity companies are licensed in all states.
FAQs
If you want to save money on insurance, actual cash value coverage is usually cheaper. However, you may not get enough to buy new replacements for the belongings you lost, so balance the savings on your premium against what you'd have to pay out of pocket should you have to file a claim.
Why is replacement cost better than actual cash value? ›
Actual cash value may be a more affordable option, but it may not offer sufficient coverage if your personal belongings are stolen or damaged. On the other hand, RCV increases the cost of your policy, but the payout amount you will likely receive from your insurer will be higher in the event of a covered loss.
Which is cheaper with regard to premiums actual cash value or replacement cost insurance? ›
A policy with actual cash value coverage is ideal for people who want to save money on premiums. It costs less because it factors in an item's depreciation over time. For instance, if a policy with ACV coverage costs $1,000 per year, you might have to pay 10% to 20% more for a policy with RCV coverage.
What is an advantage of purchasing replacement coverage over actual cash value on your homeowners or renters policy? ›
A replacement cost policy helps pay to repair or replace damaged property without deducting for depreciation, says the III. This type of coverage may be available for both your personal belongings and your home if they are damaged by a covered peril.
Which is better agreed value or replacement cost? ›
Agreed value waives any coinsurance penalty and pays 100% of the stated amount (agreed upon amount) for any covered loss. Replacement cost covers the amount it takes to replace your property with new property of like kind and quality up to the limits of insurance. Like ACV, replacement cost is subject to coinsurance.
Why is it a good idea to have replacement cost on your property? ›
Understanding home insurance replacement cost coverage is crucial for homeowners seeking to protect their financial investment in their homes. Replacement cost homeowners insurance provides the ability to rebuild or repair your home and replace personal belongings without deducting for depreciation.
How much would a homeowner receive with actual cash value coverage? ›
What is actual cash value? After a loss, actual cash value (ACV) coverage pays you what your property is worth today. Actual cash value is calculated by taking what it would cost to buy your property new today, and subtracting depreciation for factors such as age, condition and obsolescence.
Which valuation method is best replacement cost or actual cash value? ›
If you want to save money on insurance, actual cash value coverage is usually cheaper. However, you may not get enough to buy new replacements for the belongings you lost, so balance the savings on your premium against what you'd have to pay out of pocket should you have to file a claim.
Should you insure your home to its full value? ›
Replacement cost is how much it would cost to reconstruct your home as it is now, and most homeowners policies offer replacement cost coverage. However, if you don't insure to the full value of your home, you may find yourself responsible for a significant portion of the rebuilding costs in the event of a loss.
What is the disadvantage of actual cash value coverage of personal property compared to replacement cost coverage? ›
An RCV policy will help replace damaged or stolen property with new items, while ACV will only cover the depreciated amount, meaning you'll have to pay more out of pocket to replace everything brand new at today's prices.
Cons explained
Loans may reduce the death benefit: Withdrawals and unpaid cash value loans can reduce the death benefit for your heirs. And, if you take out all the cash value and stop paying premiums, the coverage lapses, and you lose the life insurance protection altogether.
How do adjusters determine actual cash value? ›
ACV is used to determine how much of a payout you will receive for a totaled vehicle. It is determined by the replacement cost of your vehicle minus depreciation, which considers things like age and wear and tear.
Why is cash value life insurance bad? ›
It's also worth noting that cash value will not build up quickly. It may take 10 years or longer before your policy is worth enough for you to reap the benefits. Additionally, the cash value of some policies will revert to the insurance company upon your death.
What is the main difference between replacement cost coverage and actual cash value coverage? ›
Unlike actual cash value coverage, replacement cost value does not take depreciation or wear and tear into consideration. Instead, it reimburses you based on how much it would cost to replace, repair, or rebuild your property at today's prices. As with ACV, your policy's coverage limits and deductibles will apply.
Why is replacement cost important in real estate? ›
For a damaged asset, the replacement cost for that asset takes into consideration the pre-damaged condition of the asset. Replacement costs are common in homeowner insurance policies to cover assets that are damaged or destroyed in a disaster, such as an earthquake, flood, or fire.
What does 100 replacement cost mean for insurance? ›
Replacement cost coverage pays for the replacement of damaged items so you can buy new, equivalent items. This coverage reimburses you 100% when you replace your items with new, similar items. The difference between the replacement cost and the actual cash value is called recoverable depreciation.
What are advantages of replacement cost? ›
Here are some of the most significant advantages: 1. Accurate valuation - Replacement cost provides a more accurate valuation of the item being insured. This is because it takes into account the current market value of the item, which may have increased since it was purchased.
Why is replacement value higher than market value? ›
When is replacement cost higher than market value? Since market value is only influenced by what buyers are willing to pay for a property and not how much it costs to rebuild, reconstruction costs can actually be higher than what a home is actually worth.
