Whether you are purchasing homeowners, renters, or auto insurance, there are two types of coverage that you will need to consider: Replacement Value and Actual Cash Value. In most cases, Actual Cash Value is the standard that is included in the insurance policy – and it is also the least expensive. However, it is worth considering the value of the asset (car or personal items in your home) that you are insuring to determine which insurance coverage is right for you.
First, it’s important that you understand what the difference is between them. Here is a basic explanation of Replacement Value and Actual Cash Value insurance.
Replacement Value insurance allows you to replace your stolen or totaled car with a similar car at the current market value – no matter the age and condition of the car you had. For example, if you purchased a brand new car three years ago and it had substantial mileage or wear and tear at the time you were in an accident, your insurance company would pay out enough to purchase a current model of the car you bought three years ago.
Actual Cash Value
Actual Cash Value coverage will pay out what your 3-year-old car was worth at the time that it was damaged or stolen. Actual Cash Value insurance will take into account that you owned the car for three years and that it had a certain amount of mileage and wear and tear, which means it will not be valued at the same price when you initially bought it since all cars depreciate in value. If you want to replace your damaged or stolen car with a new and similar model, you will have to use some of your own money to make up the difference since the insurance payout will not be enough to cover the full cost of a new car.
How Does Your Insurance Calculate Actual Cash Value?
The typical ACV calculation depends on the replacement cost and depreciation. We’ve discussed the first factor, so what about the second? Depreciation can be determined by the expected lifetime of the item (car, TV, laptop, couch and other personal belongings), which will help calculate how much its price decreases by year of usage.
Let’s say you have a $500 camera, which now has 2 years since your purchase. It has a life expectancy of 10 years. With this information we can see:
- $500/10 years = Its price decreases $50 each year
- With 2 years since the purchase, ($500-$100), your ACV would be $400.
Applied on Car Insurance
It’s well known that the moment you buy a car, its value starts to decrease. Time and usage affect its value. That’s why replacing it after an accident can be tricky, since your insurance provider has to calculate its actual cash value taking into account its time used, mileage and many other factors.
That’s why some drivers prefer new car replacement insurance. Even though it’s more expensive, it will guard your vehicle against depreciation.
Applied on Homeowners Insurance
Here you can insure your property and items you own in them, so if they are affected, they can be either repaired or replaced. It’s important to know the definitions of ACV and RCV, since they can apply differently depending on your insurance provider. For example, repairs for the physical structure of your property (like your roof) normally the replacement cost basis is taken into account, though personal property claims could apply with either. Don’t confuse RCV with the home’s market value!
Specifically for home insurance, you can also apply different RCV add ons. While more expensive, they increase your replacement cost value coverage, giving you and your family peace of mind in case of loss because you live in areas with known risk conditions such as floods or hurricanes.
Extended Replacement Cost Coverage
This additional coverage increases your replacement cost value by an agreed upon percentage. This is useful if your acquired costs exceed your policy limit. The extension depends on your insurance provider’s coverage options, but could vary between 10% and 50%. For example, if you insure your home with a limit of $200,000, you could extend your coverage by 20%, which means your limit is now $240,000 in case you need it. Of course, you shouldn’t forget about deductibles.
Guaranteed Replacement Cost Coverage
Let’s go back to the hurricane example. Imagine that, unfortunately, your home was destroyed by a hurricane. The cost of rebuilding will most probably be way beyond your established coverage limit, leaving you with a substantial amount to pay for yourself. However, a guaranteed replacement cost insurance prevents that, giving you maximum coverage. As the name states, it guarantees your home will be rebuilt or repaired to its original condition. We’ll repeat: don’t forget about deductibles!
Applied on Renter Insurance
Like with a home insurance policy, your renters insurance coverage can include actual cash value or replacement costs. They are applied to your belongings, such as electronics. Let’s say a burglar enters your home while you are away and takes your $2,000 laptop (ouch!). A replacement cost policy will give you back your $2,000, while an actual cash value policy will take into account its depreciation. Both will also count deductibles.
So, Is It Better to Have Actual Cash Value or Replacement Cost?
Many people ask if it’s better to have cash value or replacement cost. Well, there’s no clear cut answer and it depends a lot on your budget and preferences. One way to figure out which coverage is best for you is to think about the value of your property and the potential cost to replace it should it be damaged or stolen. On the one hand, choosing Replacement Value insurance guarantees that you will be able to fully replace your property at the current market value.
The downside to this coverage is that the monthly insurance premium will be significantly higher than Actual Cash Value insurance. On the other hand, choosing Actual Cash Value insurance is typically more budget-friendly. However, in the event that you need to replace your property, you will likely not receive enough claim money to cover the full cost.
Now that you have a better understanding of each type of coverage, you may want to make some changes in your car insurance plan. You can get a free car insurance quote online through Freeway Insurance that will provide you the best coverage at an affordable price. Call Freeway today at (800) 777-5620 or visit any of our locations and talk to an insurance agent.