Actual cash value (ACV) and replacement cost are two different methods insurance companies use to value your personal belongings in your home. Depending on if you have a replacement cost or an actual cash value home insurance policy, your payout after a claim varies a lot. This article covers:
In this article:
What is actual cash value coverage?
Actual cash value or ACV is based on the current cost of the covered item minus depreciation. ACV policies reimburse you based on the value of the item at the time of loss, factoring in depreciation. Depreciation is the drop in value of property due to age and wear and tear.
For example, a $1,500 laptop you bought two years ago is going to be worth less than a new one today. If you have an ACV home insurance policy, your insurer may give you a check for $800 for the computer due to depreciation.
What is replacement cost coverage?
Replacement cost is the total amount needed to repair or replace destroyed, damaged or even stolen property. Replacement cost coverage pays out on your stuff at whatever the current price is for the covered item, even if it is higher than what you originally paid. If a replacement item can't be found, your home insurance company will pay you for an item of equal value. This way you can find a similar replacement.
For example, if you have a $700 flat screen TV that you bought four years ago and it is destroyed in a fire, your insurer will pay you to get a new one of same or equal function, even if it costs more now. If your make and model of TV can be found for less, you may be reimbursed for the remaining amount.
Is ACV or replacement cost better for you?
Overall, a replacement cost home policy is a better value when you file a home insurance claim. Replacement cost will pay the retail cost of replacing destroyed, damaged or lost items.
Most homeowners go with an ACV policy due to the price difference. Actual cash value policies tend to be much cheaper than replacement cost policies. While the low cost of an ACV policy can be attractive, a replacement cost policy's range of coverage pays you out better.
A HO-3 policy, which is the most common type of policy, usually pays out claims at actual cash value for your personal belongings. HO-5 policies, which are comprehensive policies, cover personal belongings at replacement cost. Both policies, however, will cover the structure of your home at replacement cost.
If you want to get a good idea of which policy type is better for you, look over your inventory list of your belongings. If you have a lot of stuff that would get a low payout now, replacement cost home insurance is going to be your better choice.
Replacement cost limits
An important thing to know about replacement cost is that your coverage can be limited depending on your coverage limits. You can purchase additional coverages to better protect your home and belongings.
Guaranteed replacement cost
Guaranteed replacement cost will cover the entire cost of rebuilding your home in the event of a total loss even if the cost exceeds your policy limits.
Extended replacement cost
Extended replacement cost will extend your dwelling coverage limit. This is especially useful if the cost of materials and labor increases in your area.
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