Replacement Cost (RC) vs Actual Cash Value (ACV)

Replacement Cost (RC) vs Actual Cash Value (ACV)

As professionals in the insurance industry at Staples & Associates, we always work to keep policyholders knowledgeable about their policies and coverages. Our goal is to make sure the policy’s contents are clearly understood and applicable to your current needs from the time you contemplate buying a policy all the way through your annual renewal reviews. But it is widely known that only a small portion of new information truly stays in the mind. Therefore, our intention is to offer a convenient location to refer to some crucial components of your policy that will be useful when you need additional information.  

With insurance, the way your property or belongings are valued is generally based on two methods. Replacement cost method (RC) and Actual Cash Value (ACV). Should you have to make a decision, the following article will assist you to distinguish between the two and provide you with some insight into which one is best.  

What is Actual Cash Value? 

Actual Cash Value or ACV for short will pay to repair or replace your home or belongings taking into account the depreciation of your property.   

Let’s imagine you purchased a television four years ago to assist in illustrating ACV. You paid $3,000 for the brand-new surround sound system. When using ACV, 4 years of depreciation will be taken into account when determining how much the insurance policy would pay in the event of a covered loss. The loss amount that insurance would pay is $2,000 without taking into account your deductible, assuming it has depreciated by $250 per year (disclaimer: this is not a precise value for what or how surround sound systems depreciate at all).  

While this is not the most optimal structure for coverage as it may not be enough to replace the property or items in a loss, its benefit is within the price. You will pay less for this coverage in comparison to the Replacement Cost option.  

What is Replacement Cost? 

Replacement Cost or RC for short is the more optimal option. RC will pay to repair or replace your home or belongings without taking into account depreciation.  

Let’s go back to that surround sound system example. If you bought that Bose surround sound system for $3,000, replacement cost will aim to pay what a similar Bose surround sounds system costs to replace. Hence the name “Replacement Cost” 

Obviously, this is the better of the two valuation methods. Especially at a time of loss. While this does in fact cost more on your policy. The offset of risk with a potential loss will far outweigh the difference in price with coverages.  

Should I Choose Actual Cash Value or Replacement Cost?

Great question!  If you ask any experienced insurance agent about this specifically, you should receive the answer of replacement cost 100% of the time. You can even ask them how they insure themselves and you would absolutely get this answer.   

Depreciation, as previously said, may leave you scrambling to replace every piece of furniture in your house following a fire. Even if one instance can appear to have little impact, consider it on a bigger scale. If you need to replace your entire home’s furniture, electronics, clothing, computers, roof, deck, and more. You might need to fill a gap of hundreds of thousands of dollars if depreciation is factored in. Not exactly welcome news after a loss. 

If this or any article has sparked your curiosity about these methods of coverage or you would like to review what you currently have, reach out to any one of the experts at The Staples Agency. We have a dedicated coverage team on hand that would be delighted to review your current coverages and potentially find you something better suited for your needs.

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