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Edited by John Leach
Last Updated June 4, 2021
Your home insurance policy can reimburse claims of property damage after a covered loss in two different ways. These are actual cash value and replacement cost. It can be hard for many to choose which to use when you may face a covered loss.
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What Is Actual Cash Value for Home Insurance?
Actual cash value ( ACV ) helps with the costs when your home needs to be rebuilt or damaged items need replacing after a covered loss. Actual cash value is based specifically on an item’s depreciated value. Depreciation is defined by the decreased value of an asset over time, due to everyday wear and tear.
To calculate the depreciated value:
Original cost – salvage value = total depreciation
Divide depreciation amount from the number of years in the total “ useful life” of the item
To find out how much it depreciates per year, and then again by 12 to find out monthly
It’s important to note that if you choose actual cash value to replace items in your policy, you will only get the amount of money that your belongings are currently worth (i.e., after depreciation).
Let’s go over some examples in which you would need to use actual cash value and the differences between actual cash value and replacement cost coverage. You can determine which type of policy is best for you.
What Is Replacement Cost Coverage?
Replacement cost coverage covers the total replacement cost of your home and belongings in the event of damage or destruction. Unlike actual cash value, replacement cost covers the price to rebuild your home when it was new. It also pays for new items if your belongings are damaged or stolen. When you go to purchase home insurance, replacement cost coverage is usually the default.
It’s important to remember that the replacement cash value applies to the value of your home or personal items, not to the land your home is on. It’s important to check your policy to determine whether you have actual cash value or replacement cost coverage. If it’s replacement cost coverage, you should hire a contractor or appraiser to figure out your home’s replacement cost. A contractor or appraiser can price the cost of construction materials, valuable fixtures or attachments, and additional living spaces like a porch.
Finding out what coverage levels you need is the first step, but finding the cheapest home insurance is next. Use Insurify to help you find the most affordable rates to meet your needs.
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ACV vs. Replacement Cost Coverage for Property Insurance
The main difference between the two is that replacement cost usually ends up being higher than actual cash value, mainly since actual cash value is based on a depreciated cost. For the most part, your items will not appreciate or gain value with time. In some cases, jewelry, firearms, precious metals, gemstones, and antiques gain value. To properly insure these items, you will need special coverage in your replacement cost policy. In most cases, to cover these items at full value, you will need to purchase additional insurance even with replacement cost value.
In both cases, it’s essential to know that neither an actual cash value policy nor replacement cost coverage can be used to buy pricier replacements for damaged or stolen items. Many people believe they can upgrade their TVs, computers, and other items to top-of-the-line versions, but it’s just a myth. If anything, the actual cash value will give you less—even for rebuilding materials. Sorry, no marble tile for you if you think you can upgrade from vinyl.
It’s standard for a homeowners insurance policy to automatically come with replacement cost coverage for your home’s structure on the insured property. The repair and possible rebuild of your home will be done with similar quality materials when it comes to your whole house or certain portions of it. Depreciation is not taken into account, so the year your home was built will not be factored into the materials. It’s a match with the quality of materials.
If you own an older home, it’s wise to purchase modified replacement cost coverage. That way, the full cost of rebuilding your original home will be done with common modern materials. Many building materials from back in the day are now outdated, and there are plenty of modern alternatives commonly used for homes.
Policyholders should know how much it would cost to rebuild if the unthinkable happened. Any upgrades should be communicated to your local insurance agent. They will let you know if an update on policy limits is required in order to keep up with local building costs.
Replacement cost coverage covers the cost of buying new personal items at today’s fair market value should you file an insurance claim. Again, the actual cash value will be the depreciated amount of those items, which would mean losing money or the value of those items. For either instance, always keep an itemized inventory of your personal belongings, including how much the replacement costs are.
Deductibles and Coverage Limits
Homeowners insurance requires you to pay a deductible before coverage begins after a covered loss. Along with that, all insurance policies have coverage limits. Check your policy to know your deductible amount and coverage limits. If you need changes, your insurance provider will work with you to fit your needs.
Because a standard home insurance policy has coverage limits for valuable items, scheduled personal property coverage, a specific type of endorsement, exists to help. With scheduled personal property coverage, you get protection for valuable items like artwork and jewelry. Risks not usually covered by a standard policy may also be covered with an endorsement.
There may come a time when your home will need to be rebuilt or repaired due to damages covered on your homeowners insurance. Windstorms, hail, fires, tornadoes, hurricanes, vandalism, and other covered events may happen. Remember that replacement cost does not cover your mortgage balance, the total purchase price of your home, or your land price, and it’s not your home’s market value. Insuring your home at the amount it cost when you bought it is not the right move. It may also not include the remodeling or upgrades on your home; that’s why it’s essential to talk to your local agent when you make these changes.
Obtaining a replacement cost of your home is the most important thing you can do when it comes to your home’s replacement value. You can do this by getting an appraisal of your home. An accurate replacement cost appraisal will consider unique features like a finished basement, custom windows, or custom molding, to figure out the rebuilding costs. When calculating the replacement value of a home, an insurance adjuster will take into account the following:
Your home’s location
Major upgrades, types of upgrades, and years of upgrades
Your home’s square footage
Building materials for the interior and exterior, including the foundation
Quality of your home (i.e., craftsmanship)
Fireplaces inside your home
Code upgrades and debris removal, often needed for rebuilding due to damages, may not be included in the costs.
Property damage from weather-related events or vandalism is no joke. Thankfully, you can be covered by the best home insurance companies by using Insurify to compare based on your insurance needs.
Actual Cash Value Coverage
If you do end up with actual cash value coverage, it’s essential to know how insurance adjusters come up with the measured value. The insurance industry adjusters determine ACV by taking replacement costs, and then they deduct depreciation due to wear, tear, and age. Adjusters don’t have to do much work to come up with the value. Let’s say you have a $3,000 chair with a 15-year lifespan. $200 is deducted from the original value every year. So, if your chair is only three years old, it’s depreciated by $600, making it worth $2,400.
Actual Cash Value Work
The work to figure out the ACV on items looks like the following:
Asset ($3,000) divided by 15 years = $200 (yearly depreciation amount)
Number of years owned (three years) x Yearly depreciation amount ($200) = $600
Original value ($3,000) – $600 = $2,400 ACV
Frequently Asked Questions
Foundation damage can wreak havoc on all kinds of properties. If you have commercial property insurance, it's important to look at your policy, as foundation damage is expensive to repair. It's up to your insurance company to act in good faith to provide a proper payout for foundation coverage.
Because a vehicle's value depreciates as soon as you drive it off the lot, most auto insurance companies cover actual cash value rather than replacement cost. Check if your car insurance policy has an actual cash value coverage. If your policy says they cover ACV, the insurance company will pay the vehicle's value before the accident, minus any deductible.
It all depends on the renters insurance policy you purchase. If you are buying ACV, the insurance company will pay you what your item is worth in the present minus depreciation. Replacement cost policies tend to be more expensive, though they pay out more if you have to file a claim.
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