Imagine waking up to find your kitchen on fire. The refrigerator, oven, and dishwasher are all gone. You make a claim with your homeowners insurance, expecting to get enough money to replace them. Instead, you learn that you’ll be compensated based on the actual monetary value of the appliances. As a result, your payment is insufficient to purchase new replacements for the equipment you lost.
Understanding how actual cash value works will help you decide whether it’s adequate for your needs or whether you need to upgrade to more comprehensive coverage.
What is the actual cash value?
Actual cash value (ACV) coverage, also known as depreciated cash value, covers the cost of replacing your items after depreciation is deducted. Depreciation is the decline in value that occurs over time as objects age. That means your insurer will consider the age, condition, and wear and tear of your belongings and compensate you for their current “used” worth, minus your deductible. Your deductible is the portion of your claim that you are responsible for paying out of pocket.
In other words, if you have an actual cash value insurance and make a claim after a loss, your compensation could be less than the amount you paid for the damaged item.
How actual cash value works
Personal property and dwelling coverage are two important parts of house insurance. Let’s look at how actual cash worth relates to both.
Personal Property Coverage
The most popular sort of personal property insurance is actual cash value. Laptops, appliances, gadgets, furniture, books, clothes, and other possessions fall under this category.
Suppose a computer you purchased for $2,000 two years ago is stolen, and you make a claim with your insurance company. If your policy includes actual cash value coverage, the insurance company will not pay you $2,000. Instead, your insurer will compute the laptop’s depreciated value. If the company assesses the laptop’s true cash value to be roughly $1,200, your insurer will pay you that amount, minus your deductible.Â
If you have ACV coverage and want complete replacement coverage for your personal possessions, talk to your home insurance agent. You might be able to upgrade to replacement cost insurance.Â
Dwelling coverage.
Dwelling coverage protects your home, garage, and any other associated structures on your property. Your home is often insured on a replacement cost basis rather than actual cash worth coverage. This means that if your home is damaged or destroyed, the insurance provider will cover the cost of repairing or rebuilding it to its original condition, except depreciation.
One notable exception is your roof, which may be covered for actual cash value if it is older. Assume your roof is projected to last 20 years, but a storm damages it ten years after it was installed. If you have ACV coverage, your insurance provider will pay the depreciated worth of your roof, less your deductible.
Check your policy to see what kind of coverage you have for your roof and home. Some insurance companies will convert your policy to ACV coverage when your roof ages.Â
Actual cash value vs. replacement cost coverage
One of the most crucial considerations you’ll make when buying home insurance is whether to get actual cash value or replacement cost coverage.
- Actual cash value is the cost of replacing damaged or stolen property, less depreciation. It often costs less than replacement cost coverage.
- Replacement cost coverage covers the full cost of replacing your property, with no deduction for depreciation. It often costs more than ACV coverage.
When deciding between ACV and replacement cost coverage, consider how much you’ll save on premiums versus how much you could lose in a catastrophe. You may save a few dollars on your monthly premium by using actual cash value, but if your home burns down, you might be out of pocket by tens of thousands of dollars.
