As you shop for renters insurance, understanding the differences between actual cash value and replacement cost coverage may help inform your purchasing decisions. Since each type of coverage has its pros and cons, here’s a look at how they work and how the advantages of each may compare to your needs.
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Actual cash value vs. replacement cost renters insurance
For renters insurance, the terms actual cash value (ACV) and replacement cost value (RCV) refer to the way the insurance company pays for your personal property, or belongings, if they are stolen or damaged by a covered peril, such as a fire or fallen tree.
- The ACV of an item is its value after depreciation. For example, if you bought a sofa for $1,000 five years ago, its actual cash value today, after you account for its age and condition, may only be $600.
- The RCV of an item is the cost of replacing it with a new one of the same kind and quality. The actual cash value of your five-year-old sofa may only be $600, but the cost of replacing it with a new one with the same specifications may be $1,200.
Standard renters insurance typically covers your eligible belongings at ACV, but many companies give you the option to pay a little more for replacement cost coverage. The upgrade often adds about $10 to $30 to your monthly insurance costs, depending on the company.
A few companies, including USAA, offer replacement cost coverage as a standard feature in their renters insurance policies.
As you compare renters insurance quotes, it’s important to check on how each proposal covers your personal property, or contents, as this may account for price differences between them.
You can also ask the agents you shop with to provide separate quotes showing rates for each type of coverage.
Regardless of whether you choose ACV or RCV, your deductible is subtracted from your insurance settlement, and your payment is capped at your policy’s personal property limit.
| Coverage type* | Pro | Con |
|---|---|---|
| Actual cash value | Cheaper | Deducts depreciation from your payment for stolen or damaged items |
| Replacement cost | Pays to replace eligible stolen or damaged possessions with new items | More expensive |
| *Applies to personal property, or contents, coverage. | ||
Why is replacement cost renters insurance more expensive?
Replacement cost renters insurance is more expensive than ACV coverage because it requires an insurance company to pay out more money on a potential claim.
For example, if the ACV of your belongings is $30,000, the cost to replace your items with comparable new ones may add up to $45,000. In this scenario, a replacement cost policy requires the insurance company to pay you $15,000 more than you’d get with ACV coverage if a covered peril destroys all your belongings.
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How are replacement cost renters insurance claims settled?
If you opt for replacement cost coverage in your renters insurance policy and your items are stolen or destroyed by a covered peril, you typically receive multiple payments from the insurance company.
The initial payment will reflect your belongings’ ACV, based on your insurance company’s formula for calculating property values and depreciation.
You typically need to purchase your replacement items and submit your receipts for them to the insurance company to receive the remainder of your settlement.
ACV and RCV coverage both require you to document your items in order to receive payment from the insurance company. The best way to do so is to create a personal property inventory when you initiate your policy, or soon after. Just make sure to update it and keep it with photos of your items in a secure cloud folder, safe deposit box or other location you can access after an emergency.
Your inventory should include the brand and model of each item, along with its purchase date, location and price. Having an updated inventory at the ready can go a long way toward expediting your claim and making sure you receive a fair settlement.
Is replacement cost renters insurance worth it?
Replacement cost coverage is usually worth it if you have a lot of possessions and the coverage is offered at a reasonable rate.
If you tend to purchase the latest in furniture, electronics, gadgets and gear, replacement cost coverage may save you thousands of dollars if a fire or other covered peril destroys your possessions.
This may make replacement cost coverage a good deal for you, particularly if your insurance company offers it at an affordable price.
On the other hand, if you prefer sparse decor and/or lower value items, the potential benefits of replacement cost coverage may not justify a higher premium.
However, it’s also important to avoid undervaluing your belongings. At first, you may not think your possessions have much value. However, you may discover otherwise when you add up the value of your items for your personal property inventory.
How do ACV and RCV policies protect my valuables?
Whether you choose ACV or RCV coverage, renters insurance typically places limits on the amount of coverage you get for valuables such as jewelry, furs, camera equipment and certain hobby and recreational equipment.
For example, renters insurance policies cap their coverage on jewelry at $1,500 or less and place similar limits on other valuables.
However, many providers also offer scheduled personal property riders or endorsements that allow you to increase your coverage on specific valuables.
Though policy terms vary by company, a scheduled personal property rider or endorsement typically covers your valuables up to their appraised value, often on a replacement-cost basis.
Scheduled personal property coverage typically also protects your listed valuables from a wider range of perils than a base renters insurance policy. For example, many scheduled personal property riders cover mysterious disappearance, in addition to normal renters insurance perils such as fire and theft.
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