Actual Value vs. Replacement Cost | US News – U.S. News & World Report

Homeowners, renters, and condo insurance are designed to reimburse you for losses caused by a covered peril. Depending on the type of claim you file, your insurer will determine the cost of replacing or repairing your belongings or dwelling by looking at actual cash value (ACV) or replacement cost value (RCV). Claims related to the physical structure of your home typically are settled on a replacement cost basis. Personal property claims may use either ACV or RCV, depending on your policy.

What Is Actual Cash Value (ACV) Coverage?

Actual cash value coverage factors in depreciation and normal wear and tear when settling claims. It typically applies to the personal property portion of your homeowners policy. For instance, if you purchased a new bed for $1,500 five years ago that was recently ruined in a house fire, it’s unlikely you’ll be reimbursed for the full cost of the mattress. If that claim is approved, you will receive only the current estimated value, which will be a fraction of the original amount you paid, minus any deductible.

Reimbursement also depends on your policy’s coverage limits and deductible amounts. For instance, if your bed is valued at $900 and your deductible is $500, your insurer will only reimburse you $400 for the damaged bed. Similarly, if your roof is damaged and the ACV is $15,000 but your policy limit is $10,000, your insurer will only reimburse you for costs up to $10,000. You’ll be responsible for paying the remaining expenses out of pocket. Because ACV policies often provide less coverage than their RCV counterparts, they are typically the cheaper insurance option.

What Is Replacement Cost Value (RCV) 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. For example, your home was destroyed in a fire and your policy includes $300,000 in replacement cost value coverage. If the cost to rebuild is $290,000, your insurer will reimburse you for the full cost to rebuild your home, minus your deductible. If, however, the total cost to rebuild is $350,000, you will have to pay the additional $50,000, plus any deductibles, out of pocket.

What Is Extended Replacement Cost Coverage?

Extended replacement cost coverage is a policy add-on that increases your RCV, typically by a percentage, in the event that a covered peril results in costs that exceed your policy limit. Depending on the policy and insurer, this amount may be fairly low, such as 10%, or as high as 50% or so. If you have a coverage limit of $300,000 on your dwelling, for example, and you opt for an extended replacement cost of 20%, that would give you $360,000 to rebuild if your home were destroyed, minus any policy deductible.

What Is Guaranteed Replacement Cost Coverage?

Homeowners looking for maximum coverage may decide to purchase guaranteed replacement cost coverage as an add-on to ensure they can rebuild or repair to their home’s original condition. This coverage will reimburse the policyholder for the full cost (minus deductibles) of restoring their home back to its original size, specifications, and finishes.

For example, if you have a $300,000 limit on your dwelling coverage and the cost of rebuilding your home is $425,000, you would be responsible for paying the difference. With guaranteed replacement coverage, that overrun will be covered. With this type of policy, the only out-of-pocket expense incurred is your deductible. Some policies will even allow a small percentage for additional improvements, such as adding a deck that wasn’t part of your home originally.

These types of policies are not available in every state, so you should check with your local insurance providers to see if guaranteed replacement cost coverage is an option.

What Is Modified Replacement Cost Value Coverage?

If you own an older home or one that is historically or architecturally significant, you may have to purchase dwelling insurance that comes with modified replacement value coverage. Let’s say you own a home built in 1892 and it includes the original ornate crown molding, lath and plaster walls, and custom stained glass. Whether your home is damaged or completely destroyed, modified replacement cost value coverage focuses on functional replacement rather than accurate restoration. You will only receive as much money as it takes to rebuild or repair with current-day materials, including standard molding, drywall, and modern fixtures.

FAQ

What is the difference between ACV and RCV coverage?

While ACV typically applies to personal property policies, RCV can be applied to both dwelling insurance and personal property coverage. A big difference between the two is that ACV factors in the depreciation of lost or damaged items, while RCV does not. For policyholders looking to maximize the amount they receive when making a claim, an RCV policy may be worth a higher premium.

How does actual cash value work?

Say you purchased a television two years ago for $1,000 and a recent power surge ruined it. Your personal property insurance uses actual cash value to handle claims. If your insurer determines the TV’s value has depreciated by half since you bought it, you will only receive $500, minus any deductible.

How does replacement cost value work?

Your house catches fire and goes up in flames. Your dwelling insurance uses RCV to settle claims, and your policy has a $500,000 coverage limit. The total cost of rebuilding is estimated at $510,000. That means you’ll be responsible for the amount that exceeds your coverage, in this case $10,000, as well as any policy deductible. In most cases, if you had extended replacement cost coverage or guaranteed replacement cost coverage, you would also be protected from that $10,000 overrun.

What is actual cash value vs. replacement cost in car insurance?

If your car is stolen or severely damaged or totaled in an accident, your insurer will reimburse you for the actual cash value of your car, not the replacement cost of a new equivalent. That could leave you owing hundreds or thousands of dollars if you have leased or financed your new car because vehicles begin depreciating as soon as you drive them off the dealer’s lot. Some insurers do offer auto policies that provide replacement value coverage, but a better option may be adding a gap insurance policy.

Gap insurance is designed to bridge the shortfall between what you owe on your car and what it’s worth in the event of a covered hazard or peril. If you have leased or financed your vehicle, made only a small down payment, or have a loan period of five years or longer, gap insurance may be worth considering.

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