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Key takeaways
- Replacement cost value and actual cash value coverage, or RCV and ACV, are two different ways your insurance company assesses and pays out claims.
- RCV pays to repair or replace your damaged property with a new version — without depreciation factored in.
- ACV takes depreciation into account, so you’ll receive less money from your insurance company for a covered claim.
- Most standard home insurance policies insure your personal belongings at actual cash value, but you can upgrade to replacement cost value for an extra cost.
Handling the cost of replacement is a significant portion of what home insurance does. However, when considering a homeowners insurance policy, there are two ways your insurance company can cover your stuff: replacement cost value (RCV) or actual cost value (ACV). ACV is cheaper upfront but tends to pay out less, while RCV involves higher premiums but pays out more on claims. ACV calculates how much to pay based on the depreciated value of an item. RCV, on the other hand, is based on how much it would cost to replace an item with a new similar item at current market prices. When deciding between RCV vs. ACV, there are pros and cons of each to consider.
Understanding actual cash value vs. replacement cost value
A standard home insurance policy includes several different types of coverage, such as dwelling insurance to pay to rebuild the structure of your home and personal property coverage to cover the cost of repairing or replacing your personal belongings. Personal property typically refers to electronics, clothing and furniture. For example, if a fire damages your home, your personal property coverage will help pay to replace destroyed and damaged items up to your coverage limits. However, the amount you get paid after a loss depends on the type of coverage you have.
ACV meaning: What is actual cash value?
If you want the cheapest home insurance premium, actual cash value coverage for your belongings may be the best option. After a covered loss, ACV only pays out to replace items up to their pre-damaged, depreciated value. ACV coverage for personal property is standard in most homeowners insurance policies but tends to offer you less financial protection.
RCV meaning: What is replacement cost value?
Replacement cost value coverage typically costs more in premiums than actual cash value coverage. Generally, personal property is not covered this way in an average home insurance policy. It must be added by endorsement, and you’ll likely be charged more to include it.
With RCV, your insurance provider pays to replace personal property with similar-quality new items up to your policy limits. If your items are destroyed or otherwise lost due to a covered peril, RCV won’t take depreciation into account when determining how much you will be reimbursed for them.
Generally, RCV insurance requires you to buy the replacement item and send the receipt to your insurer, at which point they will reimburse you. Some insurers may provide an initial lump sum upfront, but to get the amount for the new item you purchased, you may need to prove that the replacement model is of comparable value and prove how much you paid for it.
Extended or guaranteed replacement cost
As mentioned, when it comes to personal property, homeowners frequently have the option to choose between RCV vs. ACV. In contrast, when it comes to dwelling coverage — the part of your policy that pays to rebuild the actual structure of your home — RCV is standard. You usually will not be presented with the option to choose ACV for your dwelling because it would leave you with such significant out-of-pocket costs after a disaster. Certain states even forbid insurers to insure dwellings at ACV.
Some homeowners opt to upgrade beyond standard replacement cost coverage on their dwelling to further safeguard their finances. Here are two ways to do so:
- Extended RCV: If your dwelling is insured up to a certain amount, but it would cost more to rebuild it after a disaster (e.g., because the material is in high demand with so many local homes to rebuild), extended RCV can step in. Extended RCV gives you a certain percentage (e.g., 25 percent) of extra dwelling coverage.
- Guaranteed RCV: Guaranteed RCV will cover any additional amounts needed to repair or rebuild your dwelling after a covered disaster. Unlike extended RCV, it is not capped at a certain percentage.
Does RCV apply to all types of properties?
You can’t insure everything at replacement cost value. Most insurance companies won’t offer RCV for things that are older or in poor condition. For example, if your roof is 15 to 20 years old or older, your insurer might not let you insure it at its replacement cost value. Other types of property that RCV is unlikely to apply to include appliances, carpet, wood fences, outdoor antennas, antiques, collectibles and other items that can’t be replaced.
Is RCV or ACV better?
The short answer is that it depends. RCV offers more robust coverage at a higher cost, while ACV is cheaper but pays out less. Here’s a breakdown of how two possible claim payouts for a $5,000 couch would work with RCV vs. ACV.
| Replacement cost value | Actual cash value |
|---|---|
| $5,000 (value of couch when purchased) | $5,000 (value of couch when purchased) |
| No depreciation deducted | – $1,500 (depreciation) |
| – $1,000 (policy deductible) | – $1,000 (policy deductible) |
| Claim payout: $4,000 | Claim payout: $2,500 |
Whether to purchase personal property coverage with replacement cost or actual cash value coverage likely comes down to your specific needs and priorities. If adding RCV to your policy would make home insurance unaffordable for you, ACV is significantly better than no coverage at all. However, if you can afford the additional expense of RCV, it might provide greater peace of mind and make it easier to recover financially after a covered loss.
Depending on the belongings you own and their age, it may make sense for you to switch from ACV to RCV as your items depreciate. On the other hand, it may also make sense to switch from RCV to AVC if you have more disposable income to comfortably replace items out of pocket following a covered event. In thinking through your options, it might help to call your insurance company to see how much your premium would change if you switched from ACV to RCV or vice versa for your personal belongings.
Regardless of whether you choose ACV or RCV, you may want to consider creating a detailed home inventory to account for all your personal property. If you own a lot of expensive items, such as jewelry or high-end electronics, you may want to consider scheduled personal property coverage, as the average home policy’s personal property coverage limit is probably not sufficient to cover them, regardless of how the insurance company assesses value.
Pros and cons of ACV vs. RCV insurance
Opting for RCV over ACV for your personal property coverage could have a serious impact on your budget. The table below lists some pros and cons of each coverage option to potentially help you decide which works best for you:
| Coverage type | Pros | Cons |
|---|---|---|
| RCV | – May allow you to replace your belongings after a covered disaster with new versions of the same items – May help lower your out-of-pocket expenses after a covered loss |
– Likely raises your premium compared to ACV – Replacement items may need to be purchased before you can get fully reimbursed for your covered claim |
| ACV | – Coverage is generally cheaper than RCV coverage – May be a more affordable option if most of your personal belongings are fairly new |
– May lead to higher out-of-pocket expenses after a covered loss |
Frequently asked questions
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For dwelling coverage, RCV comes standard on most policies. For personal property coverage, most home insurance providers will offer policyholders the option between ACV and RCV coverage. If you are interested in upgrading your personal property coverage from ACV to RCV, it is best to contact your home insurance provider directly. It is rare, but some insurance companies, like USAA, may automatically include RCV coverage for personal property.
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It depends on your insurer and your policy. Switching could be as simple as calling or emailing your agent and informing them of your decision. Contact your insurer to learn more about the process at your specific company.
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Whether you have ACV or RCV coverage for your personal property, the process starts by filing a claim after a covered loss. Call your insurance provider or fill out their online claim form to begin the process. You might want to take pictures of any damage to document the loss and help verify which items need to be replaced or repaired. You’ll likely need to save receipts for any replacement items you buy. Your insurance provider may need to see those, particularly if you have RCV coverage. If you do have RCV coverage, your insurer might provide you with a base lump sum payout for your new items and pay the difference between this and the actual cost of new items once it receives your receipts.
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