Actual Cash Value (ACV) vs. Replacement Cost Value (RCV)

When it comes to homeowners or renters insurance, it’s not just about choosing the right insurance provider. You also want to make sure you have the optimal coverage amount, as well as the right coverage type for your situation. The latter includes choosing between actual cash value (ACV) and replacement cost value (RCV) for your personal property, which will determine how your policy will reimburse you for your belongings if you lose them in a covered event.

Either option has advantages and drawbacks and can be a solid choice, depending on your priorities. CNBC Select breaks down how both work, offers examples and provides advice and how to pick the correct coverage for you.

Actual cash value is a way an insurer calculates the cost to replace your damaged or stolen personal property by factoring in depreciation. This means that after a covered loss, your insurance company will only reimburse you for the item’s depreciated value. This type of coverage is typically standard to personal property coverage in homeowners insurance policies.

Note that not all companies will pay just the decreased value of your items — some may offer more. For that reason, it pays to shop around and find out the details. For example, Nationwide offers an optional “Brand New Belongings” feature which first reimburses you for the depreciated value of your covered items. Then, once you replace or repair the items, the company may pay the difference if you send them the receipt — which is similar to how RCV coverage works in some policies.

How is actual cash value determined?

Insurance adjusters inspect property damage claims to determine whether and how much the insurance provider must pay. An adjuster works out the item’s depreciation rate based on factors such as the type of the item, its condition and age. They’ll likely need a description of the item and its price at the time of purchase. For that reason, it’s wise to keep receipts for expensive property, such as certain electronics and furniture pieces.

Pros and cons of actual cash value

Most standard homeowner insurance policies offer ACV coverage for personal property — and it might or might not be the right choice for your home. Here’s what to consider:

Pros

• ACV is typically more affordable, allowing you to save on your homeowners insurance premiums.
• ACV can also be a good choice if your furniture, electronics and other belongings are new.

Cons

• If your belongings are older, you’ll have to pay more out-of-pocket to replace them with similar new items.

Replacement cost value coverage typically isn’t included in the personal property portion of your home insurance policy — but you may be able to pay more to add it. With this type of coverage, your insurance company will pay to replace your personal property lost in a covered event with similar new items without accounting for depreciation.

Usually, to get reimbursement, you’ll have to buy a replacement item and provide your insurance company with the receipt. Policies vary: the insurer may pay you a lump sum upfront or require that you prove the item is of comparable value to pay out the full amount.

As an example, Chubb offers replacement cost coverage where your belongings are covered for the amount it costs to replace them at current prices, up to your policy limit. You don’t have to replace them right away — you can opt for a cash settlement instead.

Pros and cons of replacement cost value

RCV can be an excellent option to protect your belongings — but there are potential cons to consider as well.

Pros

• With RCV, you can get a higher payout and replace your belongings with new comparable items without incurring extra costs.
• In some cases, you can get a lump sum from your insurer without purchasing new items first.

Cons

• RCV is generally a more expensive option and will most likely raise your home insurance premium.
• You may have to purchase new items first and prove they’re of comparable value to get full reimbursement.

Either ACV or RCV can be an excellent choice depending on your priorities and needs.

If your priority is to get the cheapest home insurance, ACV can help you save money and still provide financial protection for your belongings. This can also be a wiser option if most items in your home are new.

On the other hand, RCV may be a better idea if your belongings are older. Your decade-old appliances may be in great condition and working well, but if you lose them, ACV can make it expensive to replace them with new models — whereas RCV is more likely to fully cover the full cost.

Remember that your insurer may allow switching from one type of coverage to another. Get in touch with an insurance agent to see what your options are and how the change will affect your premiums.

When it comes to personal property coverage in your home insurance policy, you typically can choose between ACV and RCV. The former is a standard and more affordable option, while the latter might offer better coverage and a higher payout in case of a covered loss. Consider the age and wear of your belongings, as well as your budget, when making a choice.

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