“I’ve heard people talk about Replacement Cost and Actual Cash Value insurance coverage. But, what do these terms mean? It’s all Greek to me!” Insurance is confusing, no doubt. But, we are going to try to make the insurance jargon a little clearer, one term at a time.
Replacement Cost versus Actual Cash Value (ACV)
First, let’s discuss the difference between Replacement Cost and Actual Cash Value. In insurance, replacement cost coverage means that when you have a covered loss, your insurance company will pay to repair/replace the damage. You will only be out your deductible. However, if you have actual cash value coverage, you will be responsible to pay your deductible AND depreciation.
Here is an easy example to show the difference. Let’s say you have a new 20 year roof put on your home. When the roof is 10 years old (halfway through it’s expected lifespan), a hail storm damages it and you need a new roof. If you have replacement cost coverage on the roof, you will pay your deductible and the insurance company will put a new roof on your home. But, if you have actual cash value coverage on your roof, you will be out your deductible AND the depreciation. So, since the roof is halfway through it’s life, you would pay 50% of the cost of the new roof in addition to your deductible. (Remember, your insurance covers you for “like kind and quality.” So, if you want a better quality roof, you are responsible for the additional cost to upgrade.)
Should I have Replacement Cost or Actual Cash Value on my Home?
Most homeowners policies are written with replacement cost on the home. This way, if your home is totally destroyed, your insurance company will rebuild your home. There are few circumstances where we suggest putting Actual Cash Value on your home unless that is the only option available. Depreciation on a home can add up quickly, so be certain to keep this in mind if purchasing a policy with Actual Cash Value on the home.
More and more often, you will see Actual Cash Value coverage on your roof – especially in Oklahoma. Insurance companies are limiting the coverage on the roof to offset some of the cost of the roof claims. Most insurance companies will not allow replacement cost on a roof if it is over 5 or 10 years old. Some companies do not offer replacement cost on your roof at all. Having Actual Cash Value on your roof is ok as long as you understand how it works. Often, you get a price break on your home insurance for having Actual Cash Value on your roof. With the price break, it may be worthwhile to pay to replace your roof yourself and not have a claim on your home insurance.
Should I have Replacement Cost or Actual Cash Value on my Car?
Unlike homeowners insurance, cars are typically insured for Actual Cash Value. So, if you total your car, the insurance company is going to pay you what the car was worth 2 seconds before you crashed. (This is not the legal definition.) This is why gap insurance is important. Oftentimes, when you purchase a vehicle, you owe more than the vehicle is worth. Your auto insurance will only pay the Actual Cash Value of the vehicle, which can leave you owing the bank for what the insurance company did not pay. If you have gap insurance, they will cover some or all of this “Gap” in your coverage.
Contact the RCI Team
As always, if you have any questions, contact us and one of our team members will gladly go through your insurance policy with you. Our team is trained to review and identify any coverage gaps that you may have. And, we have multiple companies to go to if we need to find a better option for you. Your time is valuable. Spend it with your loved ones and let us spend the time it takes to shop the market for you.