You want to protect your finances against repair and replacement costs, so you buy a home insurance policy. Although you may think that your policy will cover all your belongings in the event of a covered loss, the amount your insurance company will reimburse depends on the way they view the items.
You need to understand how actual cash value and replacement cost value work in order to fully comprehend the value of your homeowners insurance policy to replace your belongings after a disaster.
Understanding ACV and RCV in Home Insurance
There are many types of coverage included in your home insurance policy. These range from personal property coverage to pay for the repair or replacement of your personal items to dwelling insurance that will cover your house. This includes, but is not limited to, your electronics, clothing, and furniture. Your personal property coverage will pay to replace damaged or destroyed items within your house if there is a fire in your home. This coverage can be up to the limits of your coverage.
The type of coverage you have will affect the amount you receive after a loss. Insurance that covers replacement cost pays to replace your TV or couch with a newer model at current prices. Actual cash value takes depreciation into account. If your TV is older than 2012 and you have ACV coverage you will likely be forced to pay some extra money to buy a new one.
It is important to note: if you own a lot of expensive items, such as jewelry, high-end electronics or art, you may want to consider scheduled personal property coverage, as the average home policy’s personal property coverage limit is probably not sufficient to cover them, regardless of how the insurance company assesses value.
What is the replacement cost value?
Coverage that covers replacement cost value is more expensive than coverage that covers actual cash value. It is generally not standard in the personal property coverage portion of your average home insurance policy, so you may need to budget a little more for your premium. It provides more coverage and makes it easier to bounce back from a covered event.
RCV allows your insurance provider to pay to replace personal property by similar quality items up to the policy limits. This policy is the closest to personal property coverage. If you lose one couch, you can get the money to purchase a comparable-quality one. You have 20 clothes items that were lost, and you receive money to replace them with the same items. This is like all insurance products. It only applies to the extent of your coverage. To ensure you have enough coverage, review your policy. You may also want to consider creating a detailed home inventory to account for all your personal property.
In general, replacement cost insurance requires that you purchase the replacement item and then send the receipt to the insurer. They will then reimburse you. While some insurers will pay a lump sum upfront, others may require you to show proof of payment.
- Pro: This allows you to replace damaged items with the same item after an accident.
- Cons: You may have to pay more and purchase replacement items before your claim is fully paid.
Guaranteed or extended replacement cost
We will be discussing the differences between ACV and RCV in relation to personal property coverage. This is because homeowners have most options. RCV is the standard when it comes dwelling coverage. This covers the part of your policy that will pay to rebuild your actual home. Because it would result in significant out-of pocket costs, you will rarely be offered the opportunity to select ACV for your dwelling.
To protect their financials after a covered event, some homeowners choose to have an enhanced replacement cost coverage added on to their dwelling insurance. Each option will increase your home insurance premium.
- Extended RCV: This is when your dwelling is covered up to a specific amount but would be more expensive to rebuild after a disaster. Extended RCV provides additional coverage for your dwelling, such as 25% or 25%.
- Guaranteed RCV (Reliable Cash Value): The Guaranteed Return on Capital will cover additional costs incurred to repair or rebuild your home after a covered event. It is not limited by a percentage, unlike extended RCV. However, guaranteed RCV is not a check. Insurance companies often include a clause that allows them the flexibility to adjust the guaranteed replacement cost based on changing circumstances. It provides the best financial protection and is the most costly.
What is the actual cash value?
If you want cheap home insurance, actual cash value coverage for your belongings may be the best option. While homeowners insurance policies typically include coverage for personal property, it will not offer financial protection.
ACV pays only to replace items that have suffered a covered loss. Your 10-year-old sofa might be worth only $100 if it is subject to depreciation. This could lead to you having to pay a lot of money out-of-pocket in order to replace all the things you lost in the catastrophe.
- The pros: ACV coverage can be cheaper than other personal property coverages.
- Cons: Higher out-of-pocket costs after a covered loss will likely be a problem.
Which is better, ACV or RCV?
It all comes down to what you need and want. ACV can still provide you with a substantial level of protection, even if adding RCV would be prohibitive. RCV can be a great option if you have the budget. It will give you more peace of mind, and help you recover from a covered loss.
It might be worth calling your insurance company to find out how much your premiums could change if your coverage was changed from actual cash value to replacing cost coverage for personal property. You can then decide what coverage best suits your needs and budget.
Knowing how your policy will pay after a disaster can help you prepare and make sure you are ready for anything.
Questions frequently asked
Which is the best home insurer for ACV and RCV?
The best home insurance company is different for everyone and depends on your specific needs. As a default, most homeowners insurance policies cover your personal property with actual cash value coverage. Many insurance companies offer personal property coverage at an additional cost. Talk to your insurance company about what you need and how you want to protect it.
How can I change from ACV to RVV?
Contact your home insurance company if you decide that you want replacement cost value coverage for personal property. This can usually be done over the phone. However, some insurance companies allow you to change your coverage online.
What can I do to get my personal property insured after a loss?
Whether you have ACV or RCV coverage for your personal property, the process starts by filing a claim after a covered loss. To begin the process, call your insurance provider or complete their online claim form.
To document any damage, you might take photos to help identify which items need to be replaced or repaired. It might also be a good idea save receipts for replacement items that you purchase. These receipts may be required by your insurance provider, especially if you have replacement cost coverage.