Replacement Cost vs. Actual Cash Value
If you’ve never had to file an insurance claim, you may not realize that your insurance payout —the amount of money your insurance company pays to fix damaged property —depends on the type of coverage you have.
Actual cash value policies reimburse policyholders for the depreciated value of their belongings. Just about any personal belonging you can think of has an expected lifespan: for laptops, this number ranges from three to five years; for refrigerators, nearly 10 to 20 years; and living room furniture like couches lasts about seven to 15 years. This depreciation happens naturally, as even your most prized possessions can only take so much wear and tear.
ACV policies simply account for this depreciation. Let’s say you have an actual cash value policy, and a natural disaster ruins your refrigerator. Your insurer will reimburse you for the refrigerator’s value at the time of loss rather than the price you paid or the actual cost to replace your fridge with a new one. This means you’ll likely receive higher payouts for your newer items, and you might not receive a payout at all for items that have outlived their expected lifespan.
Replacement cost reimbursements cover the full cost of repairing your damaged belongings or replacing them with new items at today’s cost. Since replacement cost insurance is based on today’s prices, the cost of rebuilding your home today may be different from the price you paid for your home. That’s why your dwelling coverage should be based on the cost of rebuilding your home (based on its square footage and local construction costs ) rather than your home’s fair market value. In the event that you suffer a total home loss and the cost of rebuilding exceeds your policy limit, your insurer will still reimburse your RCV as long as you’re covered for at least 80 percent of the home’s total replacement (or rebuild) cost.
To be completely protected, you’ll need to make sure you choose replacement cost for both your dwelling coverage and personal property coverage. Still, every policy has its exclusions, and even replacement cost coverage doesn’t ensure that all of your belongings will be completely reimbursed in every scenario. Many insurance companies exclude furs, expensive jewelry, and electronics from RCV coverage, and RCV policies often have stipulations for roof damage, even when caused by a covered loss. Talk to your insurance agent to better understand what is and isn’t covered in the company’s replacement cost policies.