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Homeowners Insurance 101: Know the difference between actual cash value vs. replacement cost value when choosing coverage

Couple holding up home sweet home doormat and enjoying the value of their new home

We all work hard for the homes we enjoy. They're personal to us. You might even say priceless. It's important to know about homeowners insurance, and when it comes to purchasing it, there are different ways to look at the cost of replacing your home should the unthinkable happen, such as theft, fire, tornado, storms, or accident.

There are two ways to cover your home with insurance: a policy that reimburses you the actual cash value of your home or one that will cover the replacement cost value of your home. What's the difference? Well, it can be quite a lot in terms of what insurance pays.

Let's define the differences between actual cash value and replacement cost value as your homeowners insurance provider sees it.

An upgraded kitchen with replacement countertops and new white cabinets

What is actual cash value (ACV)?

Chances are you've put a lot of money into your home with upgrades to décor, appliances, plumbing, siding, decks, etc. But just as your new car depreciates (or loses value) the moment you drive it off the car lot, so does the cash value of many of the facets of your home due to wear and tear, age, and obsolescence. Let's say you upgraded your kitchen 15 years ago. The actual cash value of the kitchen will be less than what it would cost to upgrade that kitchen today.

Actual cash value coverage reimburses you for what your property is “actually” worth today. If you have a loss, your insurance provider calculates the ACV by subtracting depreciation factors from the replacement cost.

What is the benefit of selecting actual cash value coverage? It costs less. Your regular insurance payment will be less, which can be a good thing, especially if you never need to be reimbursed for a loss. However, you may be disappointed in the amount of your reimbursement if you need to replace or rebuild damaged items after a covered loss. You will have to pay out of pocket to cover the rest of the cost of the replacement.

What is replacement cost value (RCV)?

So, let's use the car comparison again to explain replacement cost value. If you total your ten-year-old car, insurance coverage based on actual cost value would only pay you a reimbursement of what that older car was worth at the time of the accident. This can be disappointing when you need to replace the car.

The replacement cost value is the price of replacing your covered loss with new property or the labor and building supplies to do so at today's cost. You can expect that insurance will pay to cover the damage or replace your property with the same type, kind, and quality property without having to pay anything more than your deductible. Claims related to your home's physical structure are usually settled on a replacement cost basis.

Choosing replacement cost value coverage for your homeowners insurance instead of actual cost value coverage costs more, but in the event of an emergency, this kind of coverage can put your mind at ease, knowing that you can restore your property close to its previous caliber.

Blue home exterior surrounded by trees

Which is better: Replacement cost or actual cash value?

Looking at your home and your financial situation, you will need to decide the amount of coverage and the type of coverage that is best for you and your home. Either way, your homeowners insurance coverage is a good and necessary investment.

If you select to only have ACV coverage, your insurance company will pay only the amount of the current value of your covered belongings once you have met your deductible. With added RCV coverage, your insurer will pay the full price to replace the covered belongings at current costs after meeting your deductible. In the process of reimbursing the cost, you may only receive the ACV cost initially, then be paid the remaining cost once all the costs are completed.

Remember, the ACV is the actual value of your property if you were to try to sell it today. The RCV is what it would cost to replace or rebuild that property at today's prices. Consider all of these factors when deciding what's best for you.

Your friends at 21st Insurance Agency will be happy to discuss all the benefits and complexities of homeowners insurance coverage.
Contact our team at 844-343-9408 or contact us online today to get started.

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