Easily Understanding RCV and ACV Insurance: (Replacement Cost vs Actual Cost Value)

ACV Insurance

RCV and ACV Insurance

Replacement Cost Value and Actual Cash Value – It is important to know the difference!

As if understanding homeowners insurance wasn’t hard enough, you also have to know the difference between actual cash value (ACV) and replacement cost value (RCV).   However, it is imperative that you know these terms and their differences because it could mean the difference between a little money and a lot of money at claim time. Need help Understanding RCV and ACV Insurance?

What is Actual Cash Value or ACV Insurance?

The phrase “actual cash value” is not easily defined. Some courts have explained it as  “fair market value.” However, the majority of courts have supported the insurance industry’s conventional definition: the cost to replace with new property of like kind and quality, minus depreciation.

What is Replacement Cost Value or RCV?

The phrase “replacement cost value” is stated or defined in the policy as the cost to replace the damaged property with the same like kind and quality without deducting depreciation. The purpose of replacement cost is to repair or replace the item in today’s market conditions to make the insured whole again.  

Understanding Depreciation

Depreciation is the loss of value from all causes such as age, wear and tear, and deterioration.

Which is better ACV or RCV?

When comparing ACV insurance (Actual Cash Value) and RCV (Replacement Cost Value), it’s essential to understand their differences. ACV insurance typically reimburses you for the value of your property at the time it was damaged or lost, taking depreciation into account. On the other hand, RCV insurance covers the cost of replacing your property with a similar item, regardless of its depreciation.

Which is better: ACV or RCV?

  • ACV Insurance:
    • Lower premiums
    • Takes depreciation into account
  • RCV Insurance:
    • Higher premiums
    • Provides full replacement cost coverage

Ultimately, the choice between ACV and RCV depends on your individual needs, budget, and preferences. Consider factors like the age of your property, your financial situation, and your risk tolerance when selecting the right coverage option for you.

How ACV Insurance, Depreciation, and RCV Work in Regards to Your Insurance

Understanding RCV and ACV Insurance

You may find the following wording on many insurance policies.
“We will pay the cost to repair or replace with similar construction and for the same use on the premises, subject to the following: until actual repair or replacement is complete, we will pay only the actual cash value at the time of the loss of the damaged property.”

So, for example, let’s say your current homeowners is a replacement cost policy. One day you are sitting in your living room, and you hear a loud thud. You walk outside to find a tree has fallen over on your roof and causes significant damage. You estimate that your roof is ten years old. Per your policy, the insurance company is entitled to pay for the destroyed roof and make you “whole” again. When adjusting the claim, the age of your roof will be taken into consideration, and give you an initial check for the actual cash value amount of the roof.

Once you have replaced the roof by a licensed contractor,  your insurance company will issue you another check for the depreciation amount they held back initially. The total of the two checks will allow you to collect the full replacement cost value of your damaged roof.

Think of it like this, Actual Cash Value = Replacement CostDepreciation.

How to Figure Out the Replacement Cost of Your Home

Here are six easy to follow steps to calculate your home’s replacement cost and understanding RCV and ACV Insurance.

  1. Do your math. Start by studying what home builders in your area charge per square foot. Then multiply your home’s square footage by the normal rate, this will give a good idea of the replacement cost of your house.
  2. Estimate how much your home’s floors are worth. Start by looking at the pricing of your flooring type (carpet, hardwood, tile, etc.) at local stores. You will also need to know what it costs per square foot for installation. So if your hardwood floors cost an average of $5 per square foot, and you have a 2,000 square foot house, your floor’s value would be $10,000.
  3. Account for the details. Look around your kitchen and bathroom. Do you have custom cabinetry, fixtures, and upgraded appliances?  Look at your local store for the price if you had to purchase new same-quality ones.
  4. Figure the value of your home’s exterior finish. Determine the value of your house’s exterior finish from siding to windows. Remember, the cost can differ greatly based on the type of exterior siding you have, for example, vinyl may be less expensive than stonework. Plus the quality and type of your windows, basic-grade vinyl windows don’t cost as much as more custom windows such as arched, box-style, garden, or windows with inlays.
  5. Call a roofer for an estimate on your roof’s replacement cost. Contact a local roofer for details on your roof’s replacement value. The complexity of your roof’s truss system will determine the replacement cost as installment costs tend to differ greatly.  If you multiply the surface area of your roof by the replacement value of the roofing material, you can get an idea of the replacement cost as well.
  6. Maintain good records. You should always maintain a home inventory of your belongings, but keeping all receipts and records regarding repairs, upgrades, and general changes you’ve made to your house is also wise. It is a good idea to make a video documenting your home’s interior and exterior elements. This means all appliances, flooring, utilities, ceiling materials, HVAC system, electrical panel, hot water tank, exterior siding, roof materials, and attached structures like your garage, deck, and breezeway.

 Once you have the video, make sure to backup a copy of the video (on an external hard drive, for example) and any time you make changes to your house update the video.  This could help you recall the exact conditions of your property if it is ever taken out by fire or a storm.

Should I Purchase an ACV Insurance or RCV Homeowners Policy?

Understanding RCV and ACV Insurance

Now, that you know how actual cash value (ACV Insurance) and replacement cost values work on a homeowners policy, you are probably wondering which is the best option for you.  And there are a couple of things to consider before making a decision and Understanding RCV and ACV Insurance.

First, let’s talk the difference in payouts if your home has a replacement cost value of $245,000, but you decided to go with a less expensive policy and chose ACV at $187,000 that is a significant difference in the amount the insurance company is going to payout. Because here is the thing, the cost to rebuild your home doesn’t change because of the type of policy you chose. It is still going to be $245,000 to rebuild your home, and you are only getting $187,000 from the insurance company. So do you want to come up with $58,000 out of pocket to save a few bucks in the beginning?  Probably not.

If you are worried about the price difference, you can always raise your deductibles, bundle your home and auto together for a discount or look into other discounts carrier’s may offer.
Another thing to keep in mind is that if you have a lender on the home, they typically require insurance and want a replacement cost policy.  

Okay, so let’s say you have a rental property and it is a little older and needs some work. Maybe it’s not worth the replacement cost policy, and if something happens to it, you probably won’t want to rebuild. In that case, it is probably fine to carry an actual cash value policy on it. In fact, some insurance companies may only insure it on an ACV basis if it is older and not in the best condition.  

If you are not sure what to do, give us a call. We will be happy to walk you through the different scenarios and costs to find the right product that fits your needs and help you with Understanding RCV and ACV Insurance.

Understanding ACV and RCV for Wind/Hail

home insurance acv insurance

Now that we have down, ACV insurance and RCV insurance on your homeowners policy, there are two options to consider when choosing the wind/hail damage replacement. Should you choose ACV or RCV for your roof?

If you choose ACV insurance for the roof, this means that in the event your roof needs replaced, the insurance company will pay out the cost to replace/repair the roof, minus depreciation. For example, say your roof is 10 years of age, they may calculate $10,000 off the cost to replace the roof, leaving you to come up with that additional cost out of pocket. ACV insurance is generally cheaper for wind/hail deductible, but it can cost you in the long run.

If you choose RCV for the roof, this means in the event your roof needs replaced from a covered claim, the insurance provider is going to pay out the total cost to repair or replace the roof in todays market. For example, a new roof may cost $30,000 – the insurance company is responsible for paying you the full $30,000, with no depreciation factored in. A lot of Insurance companies require policy holders to carry a $5000 deductible if they choose RCV for roof damage, but all companies are different.

Unsure which option you should chose, or what the deductible options are? Give us a call, we are happy to help.

Q1: What does ACV stand for in ACV Insurance?

ACV stands for Actual Cash Value in ACV Insurance. It represents the fair market value of your property, factoring in depreciation.

Q2: How is ACV determined for insurance claims?

ACV is determined by assessing the replacement cost of the property and deducting depreciation. This value is used to determine insurance claim payouts.

Q3: Interested in ACV Insurance? Contact us for more information.

For more information on ACV Insurance, or to get a quote, please call us at 1.888.445.2793.

Additional Helpful Links

Additional Insurance Links
Homeowners Insurance Explained
Homeowners Inspection Guide
Homeowners Quotes
ACV Insurance


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Last Updated on by Camron Moss

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