When purchasing property damage insurance for a home or business, you will be given the option of having your policy cover the real cash value of your lost belongings or the replacement cost value. Unfortunately, failing to fully comprehend these phrases frequently leaves property owners with significantly less than the full amount of roof damage following a hailstorm.
What is Replacement Cost Value (RCV)?
RCV coverage ensures that a policyholder will receive the full amount required to replace covered damaged products with a “like” sort of quality. For example, if you totalled a compact family car under an RCV coverage, you should be reimbursed enough to buy a car of similar make and model year, but not enough to buy a high-end sports car.
RCV claims are among the highest-paying claims, hence their policies frequently have higher premiums. These claims also provide clients with peace of mind, because they compensate clients for the exact cost of an item rather than an adjusted amount depending on the item’s actual value.
What is Actual Cash Value (ACV)?
Actual cash value (ACV) insurance often has lower premiums than replacement cash value (RCV) plans, and for good reason: they pay less compensation in case of a claim. The amount that a lost item was actually worth is determined by deducting any depreciation the item has incurred prior to loss from the cost of replacement in the insurance term “actual cash value.”
Depreciation is important in ACV claims since an item’s value can drop by thousands of dollars depending on its condition prior to the loss. Depreciation is calculated by insurers based on the age of the lost item and the amount of wear and tear it received while in your possession. Your insurer is unlikely to pay if your roof is ten years old and in poor condition.
Example of Actual cash value(ACV):
As an example, a man paid $4,000 for a Refrigerator that was destroyed in an accident four years ago. His insurance company claims that all refrigerators have an 8-year usable life. Today, a refrigerator similar to this one costs $4,500. The refrigerator had 50 percent (4 years) of its life left when it was destroyed. The actual monetary value is $2,000, which is equivalent to $4,500 (replacement cost) multiplied by 50% (useful life left).
The book value employed by accountants in financial statements or for tax purposes is not the same as this idea. To value an item on a balance sheet, accountants deduct the purchase price from the accrued depreciation. The current replacement cost of a new item is used in ACV.