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What's Your Value - Actual Cash Value or Replacement Cost

Insurance can be confusing - especially when you are buying it for the first time. For many people, the first time that they are buying insurance is also when they are getting started in their adult life and their finances are tight, so the cost of a policy is a major deciding factor. A big factor in how much your policy will cost is whether you are insuring for Actual Cash Value (ACV) or Replacement Cost (RC). So what is the difference?

  • ACV is the current value of your stuff (your home, your auto, your furniture, etc), minus how much it's depreciated since you bought it. So if you bought a TV for $1,000 five years ago and it's now worth $500, they'll only pay you $500 if it gets damaged.

  • RCV means the insurance company will pay you the full cost to replace your stuff, even if it's more expensive than what you originally paid for it. So if your TV gets damaged and it costs $1,000 to replace, they'll pay you $1,000 even if you only paid $500 for it five years ago.

RCV typically pays out more for property damage claims, but it's also typically more expensive than ACV insurance. This makes sense because they are going to pay more in a claim to REPLACE your item. So you have to decide which is more important to you: getting more money for your claims or paying less for your insurance premiums. Some factors to consider are:

  • How fast will my item depreciate? Things that depreciate fast include electronics and autos.

  • Is there much difference between the depreciated value and the replacement cost value? If you buy an auto for $20,000 and three years later it is involved in a total loss, are you going to be able to absorb the settlement of ACV and buy a replacement vehicle? There are some items that it makes sense to insure at ACV, while there are others that will fit your needs better to insure at RC.

  • How much money are you saving in premium? Maybe insuring your items at ACV will save you 20% on your premium. In the event of a loss, the additional money that you will have to pay to replace those items because you only settled at ACV may cost more than what you saved.

It's not always an easy decision and you have to weigh many factors. The best way to decide is to talk to your insurance agent. They can help you understand the pros and cons of each type of coverage and recommend the best option for you.

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