What Value Does Insurance Pay – RCV or ACV?

September 17, 2019

Do you know if your homeowner’s or auto insurance pays actual cash value or replacement cost value? If not, it’s something you should know as it affects how much the insurance company pays if you need to file a claim.

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You should know the type of payout an insurance company will make before you accept the insurance. The difference between the two is important and can mean the difference between thousands of dollars.

What is Replacement Cost Value (RCV)?

Replacement Cost Value pertains to the cost of replacing the item, whether a house, car, or boat today. In other words, you get today’s values for the item because the insurance company reimburses you the full amount of what it would cost to replace it at today’s prices.

This helps you replace your car, home or boat in the same quality that you had before the claim. For example, if the insurance company totals your car, you will receive enough money to buy a car of similar size, make and model at today’s prices.

What is Actual Cash Value (ACV)?

Actual cash value policies give you the ‘actual value’ of the item, whether car, boat, or house at the time of the loss. In other words, it takes the purchase price of the item and takes into account depreciation that the item went through until the claim.

Cars, houses, and boats can lose thousands of dollars in value depending on their age and how much wear and tear they’ve been through. For example, if your car was old and on its last leg, you wouldn’t receive as much of a payout as if you had a brand new car that was totaled.

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The Cost Difference Between ACV and RCV

As you probably guessed, actual cash value premiums cost less than replacement cost value premiums. Insurance companies take a larger risk when you take an RCV policy because the prices of the replacement could go up, putting the insurance company at risk of a large payout.

Actual cash value premiums are lower because the insurance company deducts depreciation, according to their own calculations. They come out ahead with ACV claims, which is why they can pass along lower premiums to you.

Which Option is Better?

Choosing between ACV and RCV is a personal decision. If you want the lower premiums and can accept the lower payout should you file a claim, ACV is the way to go. If you want reassurance that you can either rebuild your home with the same materials or buy a similar car that you lost, you want RCV coverage, but you will pay higher premiums for it. Figure out the perfect balance between the coverage that you need and the premiums you can afford.

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