Understanding Replacement Cost and Actual Cash Value

One of the largest purchases that you make in a lifetime is your home. As a homeowner, it is important to be opened to learning the best ways to protect your home and the key is choosing a coverage that is right for you and your family. One way you can be a step ahead is to learn the difference between Actual Cash Value, Replacement Cost, and Depreciation before a claim occurs. 

Actual Cash Value (AVC) is when your insurance company only pays for what your property is worth at the time your claim is filed. This value is the price value of your item today minus any depreciation. In ACV traditionally your insurance carrier will payout less than the replacement cost at the time of the claim. Replacement Cost policies are typically more expensive than ACV policies, but the ACV policy will also have a lower reimbursement at the time of the claim.  

Replacement Cost Value (RCV) coverage does not consider depreciation and pays your replacement cost for your property in full. RCV is the opposite of ACV. With RCV, you are reimbursed with comparable quality. When it comes to these policies you really get what you pay for. 

Being a homeowner, it is important to be opened to learn the best ways to protect your investment, as homes are one of the largest purchases you make. It is key to choose a coverage that is right for you by learning the difference between Replacement Cost, Actual Cash Value, and Depreciation until a claim occurs. 

These are very important options to consider as a homeowner. The most comprehensive way to rebuild a home or replace an item is to utilize a Replace Cost Value. The additional cost of RCV is very minimal compared to ACV when compared to the possible loss of reimbursement with an ACV claim. 


Real-World Possibilities 

A $20,000 roof that is 15 years old and a home policy has a $1,500 deductible. 

  • If an event that is covered destroys your roof and you have ACV that depreciates the value of your roof by $800 per year, your out-of-pocket cost of replacing the roof would be $20,000 minus $9,500 (your $1,500 deductible pulse your Actual Cost of depreciation of $8,000), leaving you with a $10,500 reimbursement. 
  • An RCV policy would only have you paying $1,500 out-of-pocket for the deductible and give you an $18,500 reimbursement. 

What does your home policy cover and what are the potential out-of-pocket costs that you are subject to? The best gift you can give yourself is to know what to expect in the event of a covered claim, so you are not caught by surprise. At PCF we educate our clients regarding how they impact the amount of payout as well as the differences between ACV and RCV. 

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