Insurance is confusing. Understatement. I “learned” today about ACV and RCV. Using the word “learned” is a stretch. I am attempting to grasp the difference with the help of Mike Lacey, our General Manager here in Pensacola and Mobile at CompleteDKI.
A homeowner’s insurance policy determines how a claim will be settled depending on if it is a Replacement Cost Value (RCV) policy or an Actual Cash Value (ACV) policy. In short, Actual Cash Value is the replacement cost MINUS depreciation. Depreciation is a financial deduction based on the age and useful life of that item(s). The Replacement Cost Value is the actual cost in today’s dollars to repair or replace an item(s) back to pre-loss condition.
How about an example?!
Carpet. Insurance standards are that carpet holds value for 7 years. Let’s say that carpet is destroyed by a fire 2 years after you get it. If your homeowners insurance is an ACV policy you will be reimbursed for the 5 years of value it has left. That is your purchase price minus 2 years of depreciation. If your policy is RCV, they will reimburse you for the replacement of the carpet. It will need to be as close to an exact match as possible, financially speaking, so the same like and kind. The ACV payment will likely not be enough to cover the cost of new carpet and you will have to cover the difference, where as with RCV they will replace it.
RCV trumps ACV. Many people opt for ACV policies over replacement cost policies for homeowners insurance though because of the cost difference. In most situations, the better coverage of replacement cost homeowners policies can make homeowner’s much happier with their insurance policy after a loss occurs. Paying a little extra to avoid worry may be worth it. You could possibly offset the extra cost of your homeowners policy by raising your deductible.
Obviously, the most important thing home insurance covers is your actual home. In many cases, opting for limited coverage of your possessions paired with complete coverage of your dwelling could possibly make the most sense. Take an inventory of your possessions and decide what is right for you and your family.
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