What Is Actual Cash Value Home Insurance?

When you’re shopping for insurance, you’re offered plenty of choices. One of them, actual cash value home insurance, could help you save money on premiums. Unfortunately, this type of plan could also reduce your payouts after a claim. 

What Is Actual Cash Value Home Insurance? 

Actual cash value home insurance (ACV insurance) is coverage for the true cost of your losses minus the monetary decrease due to age or use.[1] 

Consider this example. You have a fire inside your kitchen, and the flames ruin a set of plates you purchased 10 years ago. When you think about how much these plates are worth, you may consider how much you paid for them at the cash register. Your insurance company is different. 

In an ACV plan, your insurance company will also consider how much you paid for the plates. But the company will also consider depreciation, which is the amount of value your dishes have lost over time.

Homeowners insurance advisor Kristopher Kane urges homeowners to carefully review the type of coverage they have and whether there might be a better fit.

 

What Is Depreciation?

Depreciation is an important part of actual cash value home insurance. This figure represents the monetary loss the insurance company thinks your possessions have experienced since you purchased them. 

Insurance companies generally estimate depreciation based on the following items:[2]

• The state of the property when it was damaged or lost 
• How much a new version would cost 
• How long the time would last under normal circumstances

Depreciation can be subjective. You may think something is worth a lot, and your insurance company may disagree. Resolving arguments over cost and value can take time. 

What Is Replacement Cost Home Insurance? 

Homeowners can choose actual cash value home insurance, but another option exists. Replacement cost value home insurance puts a different price point on your losses. 

Replacement cost value (RCV) home insurance is coverage for the amount needed to repair or replace your items at today’s prices.[1] A policy like this doesn’t examine how much an old product has lost value. Instead, it determines what you must pay to get something just like it. 

Let’s return to the plate example. An RCV plan would examine the plates that you lost, find another version that’s comparable, determine how much those new plates cost, and reimburse that value. 

Sometimes, ACV and RCV plans work hand in hand.[1] Your insurance company will first pay the actual cash value. Then, once the item is replaced, the company will reimburse the extra money you paid to repair or replace it. 

What Items Are Typically Covered by ACV? 

You can buy home insurance plans that use an ACV approach for everything. If you experience a loss, the company will determine the value and depreciation of everything that was lost or damaged. 

You may have an ACV plan without even knowing it. 

Even if you purchase coverage you thought was RCV, some things you own may only be paid with ACV rules.[3] Those items typically include the following:

• Roofs 
• Appliances
• Wood fences
• Awnings
• Carpet 
• Outdoor antennae 

Policies may have coverage limits on high-value items, including jewelry, art, antiques, and silverware.[4] No matter whether you have an ACV or RCV plan, you may need additional policies that cover these important items in case of loss. Confirm your coverage on high-value items, so you aren’t surprised later if they aren’t covered.

Kane says it’s important to understand that depreciation values can vary.

What Is a Typical Calculation Method? 

Homeowners with an ACV plan should understand how reimbursement is calculated. Know that this can vary a bit from plan to plan. 

In most cases, insurance companies ask these questions:

1. What did the item cost when purchased? 
2. What is the depreciation amount for the item?
3. What’s the cost difference between the two? 

Experts use roofing to explain how a calculation method works.[5] The roof replacement costs $10,000, and the deductible is $4,000. If your original roof is:

• 5 years old. Your policy will pay $4,500.
• 10 years old. Your policy will pay $3,000.
• 20 years old. Your policy will pay nothing. 

ACV Plan Pros & Cons 

Should you choose an actual cash value home insurance plan? Understanding the benefits and drawbacks can help you make a smart decision. Here’s what you should consider.

ACV Advantages

Home insurance plans under the ACV model are typically less expensive than other versions. You’ll save money on premiums every month, as the insurance company understands that they’re facing smaller risks in the face of the claim. 

ACV Limitations

If you must file a claim, an ACV plan has some significant limitations. The amount you’ll get as reimbursement may not be enough to actually replace the items you lost during the event. 

Should You Get an ACV Plan?

An ACV plan can help you save money every month on your premiums. You could pop that money into a savings account to help you if you must file a claim. Those funds could make you whole if you lose something and the insurance company won’t pay. 

If you think you’re going to need your plan, an ACV plan might be difficult. An RCV plan can ensure that you’re not hit with a big bill when you need to file a claim. 

Kane also stresses the importance of comparing short-term savings to long-term coverage when choosing an ACV policy.