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Actual Cash Value Vs Replacement Cost Home Insurance

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Filing an insurance claim will bring you a set of terms that you may have never heard before. As a homeowner, it is crucial that these seemingly unimportant terminologies have a clear meaning since actual cash value (ACV) and replacement cost will have a huge effect on the total amount of your claim.

Calculating Your Claims

The total amount of claim that you can expect will depend on three factors.

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Accuracy of the Claim

It is crucial that you explain, document, and provide accurate information on the value of your property. Keeping an inventory of your property will help you file a claim. If you can provide details, as well as, proof of the costs of your items, you will likely get a fair amount.

Type of Policy

There are several home insurance policies available to homeowners. So your claim will depend on the kind of policy you brought for your property. Your policy will dictate the actual risks covered, exclusions, and any special limits. Special limits are different from one insurance company to another. Some offer specialized insurance for homeowners that have high-value property, such as those who collect arts or jewelry.

Actual Cash Value or Replacement Cost

Before signing off that home insurance coverage, it is important to check the fine print. Because Actual Cash Value and Replacement Cost are critical factors for the settlement of your claim.

Actual Cash Value (ACV)

ACV is calculated according to the initial market value of your property minus depreciation cost. Most standard home insurance coverage will provide protection for the physical structure of your property plus the replacement cost of any damaged property. This type of policy is the least expensive since depreciation will be counted so claims will be typically lower.

Defining Actual Cash Value

Market value or initial cost minus depreciation according to the number of years that you had the property.

Insurance companies have different ways of calculating depreciation. However, the most common way is to consider the expected lifetime of an item minus the percent value for each year that the item or property is in your possession. For example, if you purchase a refrigerator for $1,000, it is expected to last 10 years. You experience a covered peril in just 4 years, the estimated depreciation cost will be 1,000 divided by 10 times 4, which equals to $400. This means the actual cash value that is insured by your insurance policy is $600. Over time, the value of your items will decrease.

Replacement Cost Coverage (RCV)

Also known as RCV, this type of coverage will replace your damaged property with the exact or nearest similar property in the market. In some insurance policies, any personal items will also be replaced. This is the most recommended option because you do not have to worry about depreciation costs.

Defining Replace Cost Value

RCV is calculated according to the initial price tag of the property or the items, regardless of the depreciation. In case you have this type of insurance, it is best that you get an appraiser to evaluate the cost of repair or rebuilding. For example, if you bought a home for $200,000, this price will probably include the cost of the land and construction of the home. If the lot was priced at $50,000, you are only required to insure the cost of your home for $150,000.

To learn how to calculate the home replacement cost, read our article: How To Calculate The Home Replacement Cost?

Extended Replacement Cost

This coverage provides the most comprehensive protection but also the most expensive. It is an expanded version of the typical RCV described above. To put it simply, this coverage will pay for the repair or rebuild of your home exactly as it was before any damage happened, even if the cost exceeds the depreciated value of the property. This coverage will protect you even if there are changes in the cost and labor in the future. If you have enough budget or your property requires this kind of protection, this option may be the best for you.

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