HOMEOWNERS Insurance : Actual Cash Value vs. Replacement Cost
One of the principle concepts of a homeowners insurance policy is
Actual Cash Value vs. Replacement Cost.
We all buy insurance, from various places. Many people think that when Insuring a home, all products are created equal. Unfortunately, this is not the reality of the matter. Homeowners insurance, comes in two different forms. The coverage amounts are based on two different values, Actual Cash Value(ACV) or Replacement Cost Value (RCV). The difference between the two is major, which is why all who have an insurance product should be aware of the vast difference between the two values.
ACUAL CASH VALUE V.S REPLACEMENT COST VALUE
Actual Cash Value (ACV) – Is the value of what your home is valued today, minus depreciation!
Replacement Cost Value ( RCV) – Is cost of replacing your home at todays price.
Know let me explain and give you two simple scenarios, to clarify.
Your home suffers a loss due to high winds and the roof is damaged. You realize that you need a new roof, and the cost of a new roof is $10,000. If your insurance policy is based on Actual Cash Value, there is a good chance you may only receive half of that amount if not less depending on how long and how much depreciation has been assessed. So imagine that you have been paying for this insurance policy on what most people consider the, if not the most valuable asset they have there home, and when you finally call to make a claim and use your insurance policy, they put you and your family in the predicament of a very difficult financial situation. Of coming up with a major amount of money, because your policy will not cover the full costs of the new roof.
Your home suffers a loss due to high winds and the roof is damaged. You realize that you need a new roof, and the cost of a new roof is $10,000. This time your insurance policy is based on Replacement Cost Value (RCV). In this scenario you call your insurance company, agent or broker to make a claim and you will receive $10,000. This is due to your insurance policy being based on Replacement cost value (RCV). This obviously is why we buy insurance, is to insure that in times of catastrophic financial loss that our policy will protect the assets that are most important to us in times of need.
Be aware that if your policy is based on Actual Cash Value, that your claim or loss you put in will be (Market Price minus depreciation), this can severely impact your pocket.
Secondly, if your policy is based on Replacement Cost Value, and you have a loss it will fully be sufficient to make up for your losses without having to pay more than the deductible.
Now I am sure your thinking, that sounds great, but I am sure this Replacement Cost Value is much more expensive than having a policy that is based on Actual Cash Value. This is not TRUE! This all depends on the company you are dealing with. Also a major hint at purchasing or getting the most coverage at the best price is to use an Insurance broker. The benefit of using a broker is that they have multiple companies that they have access to. Where an agent is representing the insurance company they work with, such as a State Farm agent or Gieco. Where an insurance broker represents his clients best interests, and has access to multiple carriers, this gives them the advantage to earning your business and providing you with the right policy at the right price.
By: Adam Huzien
Founder/ Senior Insurance Broker
Visit our Website: www.AMHBROKERAGE.com