Actual cash value vs replacement cost

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If you live in a rental property, it’s important first, that you carry renter’s insurance, and secondly, that you fully understand the difference between cash value insurance and replacement cost insurance. Some renters imagine that their personal possessions will be covered by the building owner’s insurance. This is not the case and to leave yourself uncovered would be a serious mistake.

If you doubt that your material goods have sufficient value to warrant paying premiums on them, take a walk down the aisles of even a discount department store. You probably own at least two sets of sheets for each bed in your house. Price them. Each queen-size set will cost you about $40. When you add pillows, pillow cases, a bedspread, or comforter, you will easily spend $200 per bed. That doesn’t even include the cost of the bed.

Most often, you see these kinds of insurance policies in conjunction with homeowners’ insurance. But the same theory applies to renter’s insurance. In the event of fire or other disaster, this coverage is well worth the expense to buy replacement cost renter’s coverage to protect your belongings and their value.

What is actual cash value?

Some renters insurance policies cover your possessions at their actual cash value (ACV). That means after a loss, you’ll be reimbursed for the original cost or value of your damaged items, minus depreciation. Depreciation is the monetary value that an item loses overtime.

How does actual cash value work?

When you buy a brand new car, it loses value the minute you drive off the lot. The same is true for furniture, appliances, and other personal items, including expensive electronic equipment like flat-screen televisions, audio equipment, and computers.

Here’s an example. Say your apartment catches fire and it destroys your sofa. You bought the sofa five years ago for $1,000. With an ACV policy, you might only get reimbursed $400 to replace the sofa, because it has depreciated in value over time. As a result, it’s important to make sure you have enough renters insurance coverage to provide for replacement of all your items in case of a major loss.

What is replacement cost value?

A replacement cost value (RCV) policy costs a bit more than an ACV policy, but it’s worth exponentially more to the renter in the case of a catastrophic loss. With an RCV policy, your insurance company will reimburse you for the original value of your personal belongings after a loss, up to your policy’s limits.

How does replacement cost work?

As the name suggests, a Replacement Cost Value policy is designed to help you replace damaged items at the value it would cost to replace. The depreciation of your personal belongings is not factored into your payout when you have an RCV policy.

We can use the same sofa example from earlier. If your $1,000 sofa that’s five years old gets destroyed in a fire, the insurance company would pay what it costs to purchase the same exact model brand new, or a different one of a similar price. 

Keep in mind that valuables, like jewelry or musical instruments, usually have a much lower limit. So if you owned a $50,000 jewelry collection that got stolen, it’s very unlikely that you could get reimbursed for the full value with an RCV policy. Typically, valuables need to be listed separately on your policy in order to be covered.

Filing a replacement cost claim

  • Notify your insurance company of the loss as soon as possible.
  • Make a list of all the damaged items, and include the date purchased, price, make/model/year, and serial number for larger items, like appliances.
  • Take photos and write descriptions of the damaged items.
  • Gather receipts for damaged items if you have them.
  • Send this information to your insurance company so they can verify the losses and calculate your payout.

How will replacement cost be paid?

After you give the insurance company evidence of the damaged items, insurance typically sends the payout in two checks. First, a check for the actual cash value of the damaged or lost items. You should use that payment to replace your items, even though you’ll be paying some money out of pocket.

Once your items have been replaced, keep the receipts and send them to your insurance company. They’ll verify the actual price of new items, and send you a second check with the remaining amount (often referred to as “releasing depreciation.”) If you aren’t able to replace an item with a comparable one, and you can prove it, it’s possible to negotiate a higher payout within limits.

Actual cash value vs replacement cost: which is better?

By a wide margin, replacement cost coverage is the better choice for all things insurance. You’ll receive a higher payout if your items are stolen, damaged or destroyed, so you can replace your old items with the same, or similar ones. The catch is that an RCV policy is more costly — the exact difference depends on a variety of factors specific to each provider.

If you can’t afford an RCV policy, there’s nothing wrong with an ACV policy. If you’re looking to save money, or if you simply don’t own many personal items, an ACV policy will offer plenty of coverage. The decision to get an ACV or RCV policy is largely based on personal preference, budget and the amount of coverage you need. 

The takeaway

  • When you purchase renters insurance, you can choose between an ACV or RCV policy.
  • After a loss, an actual cash value (ACV) policy will reimburse you for the value of your items, minus depreciation.
  • A replacement cost value (RCV) policy will reimburse you for the original price you paid for your lost or damaged items.
  • An RCV policy offers better coverage than ACV, but it’s more expensive.

If you rent your home or apartment, having renters insurance provides financial protection in the event of a loss. So before you purchase a policy, decide whether you want an ACV or RCV policy. An RCV policy offers the best coverage at a slightly higher price point. It’s ideal for renters who have a lot of personal belongings (especially pricey ones), while an ACV policy is better for the renter who doesn’t own many items, or needs to save money. Either way, make sure you have enough personal property insurance for your specific needs.

Elizabeth Rivelli

Elizabeth is an insurance writer for coverage.com, where she covers insurance providers and reviews policies to help consumers find comprehensive and affordable coverage for every area of their life. She has more than three years of writing experience for top online insurance and finance publications.

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