What’s The Difference between Replacement Cost and ACV?
Replacement Cost and ACV are the two coverage options for insurance policies that include personal property or building coverage on your homeowners, renters, or business insurance. They dictate how your property is valued for a claim payout, and work very differently.
ACV stands for Actual Cash Value, which is the replacement cost minus depreciation. For example, if you have a 3 year old television stolen, the actual cash value may be a fraction of what you originally paid for it. ACV is especially harsh with electronics, which become obsolete and devalue very quickly.
Replacement Cost coverage takes into account what it costs to replace or rebuild with a like-new equivalent. Take the same 3 year old TV from the previous example; the insurance company will attempt to replace it with a similar quality, brand new TV.
For homeowners insurance, it’s especially important to understand which form your roof has. Many policies offer replacement cost for your belongings and the structure, but will only pay out ACV for the roof. This is very common with roofs that are over 20 years old, and roofs with wood shingles. Sometimes ACV coverage is snuck in by unethical agents just to lower your rate. Make sure you have a reputable insurance agent or broker reviewing your coverage, and always ask them how your roof is covered so there are no surprises when you have a claim.
An ACV policy will be less expensive than one with replacement cost, but you may be underwhelmed if you actually have a claim. It’s important to note that even with a Replacement Cost policy, many insurance companies will only give you the full replacement cost value if you actually replace the item. That means if you decide to pocket the money rather than buying the item again, the insurance company may only cut you a check for the ACV until you provide them receipts showing you re-purchased it.
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