Actual Cash Value vs. Replacement Cost Value

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MSM Insurance Services Blog -

As a homeowner, it's important to understand the different types of coverage available to protect your investment. Two key terms to know are actual cash value (ACV) and replacement cost value (RCV). While they may sound similar, there are significant differences between the two which impact your insurance claim payout in the event of a loss.

What is Actual Cash Value (ACV)?

Actual cash value is a term used in insurance policies to describe the value of an item at the time it was damaged or destroyed. It takes into account the item's original value, minus depreciation, which is the gradual decrease in value over time due to age, wear and tear, and other factors.

What is Replacement Cost Value (RCV)?

Replacement cost value, on the other hand, is the amount it would cost to replace or repair a damaged item with a new one of similar quality and function. Unlike ACV, RCV does not take into account depreciation. Instead, it reflects the actual cost of replacing the item with a new one.

Comparing ACV verse RCV with An Example

Let's say you have a roof that is 10 years old and suffers significant damage from a storm. The insurance company sends an adjuster to assess the damage and determines that the cost to replace the roof with a similar one would be $15,000.

If you have an actual cash value policy, the insurance company will factor in the depreciation of the roof due to its age. If the adjuster determines that the roof has a useful life of 20 years, then you would receive a payout of $7,500 ($15,000 minus 50% depreciation for the 10 years of use).

On the other hand, if you had a replacement cost value policy, the insurance company will cover the full cost of replacement, regardless of depreciation. In this case, you would receive a payout of $15,000 and be able to fully replace their damaged roof.

Which Type of Coverage is Right for You?

Insurance is a balance between paying more now or potentially paying more later. With RCV, your premiums are higher but you are fully covered when a claim arises. With ACV, you would pay less in premiums, but may need to pay a lot out-of-pocket for a replacing items. In the example above, you'd be paying $7,500 for a new roof while the person with RCV coverage wouldn't pay a penny! You'd be paying less now, but more overall.

We recommend having RCV for the peace of mind it brings. We wouldn't want you to pay a little less now and then be in situation where you are paying excessive money to replace a roof or other item.