What is the Difference Between Actual Cash Value and Replacement Cost?
- Actual Cash Value (ACV)
- Replacement Cost Value (RCV)
The terms themselves appear innocent enough but can have a massive impact on the value of the protection you purchase with your insurance policy. The better you understand the differences between the two, the better you will be able to make the appropriate decision to match your needs.
What Does Actual Cash Value Mean for Consumers?
Actual cash value is a type of insurance that protects items in your home, such as appliances, furniture, computers, and electronics, for the cost you paid for the items minus depreciation and deductibles. The longer you’ve owned the items, the greater the depreciation.
The combined costs of depreciation and deductibles can have a high price to homeowners and renters attempting to recover a house full of items. Some items, such as antiques and heirlooms, can be decimated by depreciation alone, rendering them practically valueless, although they have tremendous value to you.
For instances like these, or if you own collector’s items, antique vehicles, etc. you might even consider agreed value insurance rather than worrying about the RCV vs. ACV question. In most debates regarding actual cash value vs replacement cost, however, the clear winner is almost always replacement cost value insurance coverage.
How is Replacement Cost Insurance Different from ACV Protection?
When you have replacement cost insurance, you don’t have to worry about depreciation. Whether you’ve owned an item 10 years or 10 days you will receive enough money in the insurance settlement to purchase a new item of comparable value. That would be the replacement value or the amount of money it costs to replace the lost, damaged, or destroyed item for like, kind and quality.
What it means for you, as a consumer, is that you can generally replace your LG refrigerator with another LG refrigerator of similar size and quality to the one you owned originally.
The same holds true when it comes to replacing other items throughout the home, including:
- Electronics & Computers
- Children’s toys
The one area where this might not work in your favor is when it comes to items of considerable value. Most insurers have specific limits for replacing types of items damaged or destroyed. For instance, if you have jewelry and/or collectibles, you might consider purchasing a rider because your plan limit may only replace your electronics up to a total of $2,000 (or some other number) for all electronics combined.
For homeowners or renters who have high-value possessions, it is worth considering insuring each item for an agreed-upon value or purchasing a rider policy to offer additional protection for these items.
However, replacement cost protection is the clear winner among those who can choose between the two. It comes at a higher cost, but offers more robust coverage and can help families climb out of the ashes of disasters and recover much faster.
What’s the Big Deal About Deductibles?
Many people choose policies with higher deductibles to help reduce their out-of-pocket expenses when disaster strikes. Unfortunately, disasters rarely strike when you have piles of extra money lying around.
That makes it a good idea to explore the intention of deductibles and what they mean to you.
What is a deductible?
As the insurance company sees it, a deductible is your shared interest in protecting your property from harm. While accidents happen and disaster strikes when it is least expected, the fact is that deductibles, when high enough, can sometimes serve to compound the crisis rather than helping you find calm during the process.
You are asked to choose your deductible when purchasing insurance. The higher the deductible, the lower your annual insurance costs. This is one reason high deductible insurance is so attractive to many consumers. After all, most consumers buy insurance, hoping never to have the need to use it.
The higher the deductible, the more of the expenses of repairs and/or rebuilding you’re expected to contribute on your own. The trade-off is that your day-to-day expenses of being insured are lower.
Sorting It Out
Choosing a deductible that works within your budget can help you avoid unnecessary delays in rebuilding and replacing your possessions in the aftermath of an emergency or disaster.
Take your time and think thoroughly when deciding whether a replacement cost plan is the better option for you than the actual cash value coverage. Ultimately replacement cost coverage offers greater protection for your possessions, allowing you to replace what is lost while actual cash value may force you to choose which items you replace in the aftermath of a covered event.
Insurance Center of North Jersey can help you determine which protection is the better choice for you.