Insurance can be filled with tons of terms and lingo you’re not familiar with. Trusted Insurance Brokers is here to try and simplify them for you.
When something is damaged, the insurance adjuster will determine how much money you will get, based on the items settlement value. For the sake of simple explanation, we’ll use your personal property or contents (aka your possessions or belongings), as a quick example.
First off, the easiest way to determine what items are considered “Personal Property”, is to imagine picking up your home and turning it upside down. Once the home is upside down, whatever would fall out is typically considered your personal property (to include appliances).
Now, there are two ways to insure your personal property: replacement cost (RC or RCV for short) and actual cash value (ACV for short) settlement value.
It is essential to know the benefits and disadvantages of replacement cost and actual cash value in order to make a decision that’s best for you.
But Replacement Cost Value and Actual Cash Value apply to more than just your belongings. They also apply to the structure of your home and/or detached structures on your property.
The following article from Law Info does a great job highlighting the differences between replacement cost and actual cash value for your home (structure) so that you can make the best decision for your homeowners insurance needs.
Replacement Cost vs. Actual Cash Value:
Replacement Cost is the amount it would take to replace or rebuild your home or repair damages with materials of similar kind and quality, without deducting for depreciation. Depreciation is the decrease in home or property value since the time it was built or purchased because of age or wear and tear. Many insurers require homeowners to insure their homes for at least 80% of the replacement cost. If the homeowner fails to insure for at least that, a penalty is applied to partial losses. For example, if it would cost $50,000 to replace your home and it is insured for $40,000 (80%), and a fire causes $25,000 worth of damage, then your insurance company will pay the full $25,000.
On the other hand, if your $50,000 home is insured for $30,000 and you suffer a $25,000 loss, your company would pay for only part of the loss and you would have to pay for the balance yourself. It may therefore be advisable to insure your home at a minimum of 80% of its replacement cost. Check with your agent or insurance company to see what is required. You may wish to insure at 100% of replacement cost so you will have sufficient coverage in the event of total loss.
Actual Cash Value is the amount it would take to repair or replace damage to your home after depreciation. For example, if your roof has a 20 year warranty and is 17 years old, there would be depreciation for the age and condition of the roof.
Most standard home insurance policies cover the contents of your home (i.e. personal belongings) on an actual cash value basis. Many insurers offer an option for you to insure your belongings at a replacement cost. The premium will be slightly higher for this coverage; however, you may want to consider the option.
Whether your home is insured for replacement value or actual cash value, it is important to keep track of its value. For instance, the addition of a room, improvements, and yearly inflation all increase the replacement cost of your home, while the actual cash value of the home may decrease over time.
Check with your agent or insurance company at least once a year to make sure your policy provides adequate coverage.
Choosing between replacement cost and actual cash value can be very difficult. However, the information provided above should allow you to make the best informed decision on which kind of coverage is most suited for your situation.
If you have already have chosen between replacement cost and actual cash value, perhaps it’s time to reevaluate. You can change this coverage at any time during your policy period and it never hurts to make certain that you have made the correct choice.
At Trusted Insurance Brokers, we offer both replacement cost and actual cash value because we want to provide our customers with the all of available choices for them.
If you are interested in learning more about these coverage options, or any of our other insurance services, please feel free to contact us. We hope you found this informative!