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When purchasing homeowners insurance, you will hear the terms “actual cash value” and “replacement cost”. Actual Present Value and Replacement Cost are both coverage options that determine how your insurer will reimburse you for an approved claim.
Although both terms refer to an insurance payout, they are not the same. The coverage option you choose will also affect the cost of your policy.
What you need to know about the actual cash value in homeowners insurance:
What is the actual cash value in home insurance?
Actual Present Value (ACV) is the amount of money that would be needed to repair or replace your home or personal property, less depreciation. Depreciation accounts for age and use, so at actual present value, your insurance carrier accounts for the cost of replacing your home or property at current value.
How Does Actual Present Value Work?
When you make a claim, an insurance adjuster will conduct an inspection and determine how much your insurance should pay out. To determine the actual present value of your home or property, the appraiser will subtract the depreciation from the replacement cost. Depreciation is how much value an item loses each year.
Learn more: Home insurance: everything you need to know
Actual present value vs. replacement cost
If you choose replacement cost coverage, your insurer will reimburse you to replace your property with a new one of equal value. While you get more coverage this way, you also pay more for it.
Here’s a comparison of actual present value and replacement cost:
|cover type||bonus||payout||claim process||best for|
|Current monetary value||Less expensive||Based on the cost of replacing items, allowing for depreciation||The insurer will calculate current value by subtracting depreciation – a home inventory and receipts will help||Homeowners who want lower premiums and homeowners who are okay with purchasing older replacements|
|replacement cost||Expensive||Pays the amount to replace the item with a new one at today’s prices||Can receive two payments, one for actual cash value and another for the difference between ACV and replacement cost once you provide receipts||Homeowners willing to pay a higher premium for more coverage|
Actual present value versus recoverable depreciation
The recoverable amount of depreciation is the difference between the replacement cost of an item and its actual present value. If you have replacement cost coverage, your insurer will make a payment for the actual cash value of your damaged property minus your deductible. To get the full cost of replacement, you must provide receipts or a signed contract to prove the replacement is complete and you need more money to cover it.
Let’s use the same example of the washer and dryer above, with a depreciated value of $750. If you bought the same (or a very similar) set for $2,000, recoverable depreciation would pay out the $1,250 difference after you presented the receipt to your insurer.
Cash: Everything you need to know about home insurance claims
Other types of replacement cost coverage
Depending on your insurance carrier, you may be able to choose from a few different replacement cost coverage options.
Here’s a quick look at three other types of replacement costs you can purchase:
When should you insure your home at fair value?
True cash value policies can be a good option if you want to save money on your home insurance and risk getting less money in the event of a disaster.
An ACV policy can also make sense if you own a newer home that hasn’t had much time to write off. Because you can review and change your homeowners insurance policy later, you may be prepared for a more comprehensive policy in the future.
If you choose home insurance with real cash value, consider adding tabs to cover irreplaceable personal items (like expensive heirlooms).
Disclaimer: All insurance related services are provided by Young Alfred.
Continue reading: How to get home insurance