What’s the difference between actual cash value and replacement cost value?
Many consumers purchase insurance and never think to ask if their asset (home, auto, RV, etc.) is covered at actual cash value or replacement cost value. Usually this questions pertains to homeowners insurance but came sometimes carry over into other types of insurance. What’s the difference? What do I need?
Actual Cash Value
Actual cash value’s simplest explanation is depreciated. Actual cash value is calculated by subtracting the depreciated amount from the replacement cost of whatever item is being insured. For example, if a twenty-year roof costs $10,000, needs to be replaced at age ten, and is insured at actual cash value, the payout will by $10,000 minus 50%. Or $5,000.
Replacement Cost Value
Replacement cost value is just that. Whatever it takes to replace the asset that is insured, is what will be paid out. Going back to the above example. If a twenty-year roof costs $10,000, needs to be replaced at year ten, or twelve, or fourteen for that matter, $10,000 will be paid out to replace the roof (minus your deductible of course). The point of replacement cost is to restore you to what you were before your claim.
So, do I need Actual Cash Value or Replacement Cost Value?
This question depends on a few things. First, what are you insuring? If you’re insuring a house, we believe it is important to insure your house at replacement cost value and many mortgage companies are going to require that you are insured at replacement cost value.
If you’re insuring a vehicle (unless it’s an antique or collector car), it will most likely be insured at actual cash value. Why is this? A home has the ability to appreciate. However, from the moment a car is driven off the lot, it begins to depreciate.
RVs can differ and can sometimes be insured at replacement cost value or “stated (or agreed) value”. Actual cash value is the cheapest and offers the least coverage, stated value offers more coverage and brings higher premiums, and replacement cost value is the highest level of coverage and brings the highest premiums.
What does SIG Recommend?
Our agency wide recommendation for homeowners, is to insure your home at full replacement cost. When we are contacted to quote a policy, we gather as much information on your home as possible and use a replacement cost tool to calculate the value at which your home will be insured. Other than antiques, all vehicles are typically insured at actual cash value. This is standard in the insurance industry.
If you don’t know which of these you are insured at, now is a great time to review your policy and decide if you are properly insured before something does happen that will warrant use of your insurance. Our agents provide free reviews and are happy to help with any of your insurance questions.