You want to protect your finances against repair and replacement costs, so you buy a home insurance policy. You may assume that the policy will pay to replace all of your belongings after a covered loss — but how much your policy will reimburse you for those belongings depends on how your insurance company views the value of your items under the terms of your policy.
To truly understand the amount your homeowners insurance policy would pay to replace your stuff after a disaster, you need to know how replacement cost value (RCV) and actual cash value (ACV) coverages work.
Your home insurance policy includes several different types of coverage, from dwelling insurance to pay to rebuild your house itself to personal property coverage to cover the cost to repair or replace your personal belongings. That includes (but is by no means limited to) your electronics, clothing and furniture. If a fire rages through your home, for example, your personal property coverage pays to replace destroyed and damaged items inside the house, up to your coverage limits.
But the amount you get paid after a loss depends on the type of coverage you have. Replacement cost insurance pays out to replace your couch or TV with a like-new version at today’s prices. Actual cash value takes depreciation into account. So if your TV was from 2012 and you have ACV coverage, you will probably be stuck paying some money out-of-pocket to get a new one.
It is important to note: if you own a lot of expensive items, such as jewelry, high-end electronics or art, you may want to consider scheduled personal property coverage, as the average home policy’s personal property coverage limit is probably not sufficient to cover them, regardless of how the insurance company assesses value.
Replacement cost value coverage costs more than actual cash value coverage. It is generally not standard in the personal property coverage portion of your average home insurance policy, so you may need to budget a little more for your premium. That said, it gives you more coverage and can make bouncing back after a covered disaster much more manageable.
With RCV, your insurance provider pays to replace personal property with similar quality items, up to your policy limits. It comes the closest to one-for-one personal property coverage. You lost one couch, you get the money to buy a similar-quality one. You lost 20 clothing items, and you get money to replace those items with similar pieces. As with all insurance products, this is only true up to your coverage limits. Review your policy to make sure you have sufficient coverage. You may also want to consider creating a detailed home inventory to account for all your personal property.
Generally, replacement cost insurance requires you to buy the replacement item and send the receipt to your insurer, at which point they will reimburse you. Some insurers may provide a lump sum up-front, but to get the full amount of the new item you purchased, be prepared to prove what you paid.
Pro: Allows you to replace your belongings after a covered disaster with new versions of the same items.
Cons: Costs more, and you may need to buy the replacement items before you can get the claim fully paid out.
Extended or guaranteed replacement cost
In this article, we lay out the difference between RCV vs. ACV as it relates to personal property coverage because that is where homeowners most frequently have an option. Generally speaking, when it comes to dwelling coverage (the part of your policy that pays to rebuild the actual structure of your home), RCV is standard. You usually will not even be presented with the option to choose ACV for your dwelling because it would leave you with such significant out-of-pocket costs after a disaster.
Some homeowners opt for an upgraded replacement cost coverage added to their dwelling coverage to safeguard their finances after a covered peril. Both options will increase your home insurance premium:
Extended RCV: If your dwelling is insured up to a certain amount, but it would cost more to rebuild it after a disaster (e.g., because the material is in high demand with so many local homes to rebuild), extended RCV can step in. Extended RCV gives you a certain percentage (e.g., 25 percent) of extra dwelling coverage.
Guaranteed RCV: Guaranteed RCV will also cover any additional amounts needed to repair or rebuild your dwelling after a covered disaster. Unlike extended RCV, it is not capped by a certain percentage. Guaranteed RCV is not a blank check, however. Most insurance companies include a clause that allows them to set the amount the guaranteed replacement cost will cover and adjust that amount periodically based on certain circumstances. Still, it provides the most financial protection under your dwelling coverage and is also the most expensive.
If you want cheap home insurance, actual cash value coverage for your belongings may be the best option. Actual cash value coverage for personal property is standard in most homeowners insurance policies but will offer you less financial protection.
After a covered loss, ACV only pays out to replace items up to their current actual cash value. For instance, with depreciation, your 10-year-old couch might only be worth $100. That could mean paying a lot out-of-pocket to replace everything you lost in the disaster.
Pros: ACV coverage is cheaper and is usually the default personal property coverage.
Cons: Will likely mean higher out-of-pocket expenses after a covered loss.
Whether to purchase personal property coverage with replacement cost or actual cash value coverage comes down to your specific needs and wants. If adding RCV to your policy would make it unaffordable for you, ACV will still give you a significant measure of protection. But if you can afford the additional expense of RCV, it might offer you greater peace of mind and make it easier to recover financially after a covered loss.
You might want to call your insurance company to see how much your premiums would change if you switched from actual cash value to replacement cost coverage for your personal belongings. This way, you can decide which coverage type best aligns with your budget and risk tolerance.
Understanding how your policy will pay out after a disaster means you can prepare, setting you up for success even in a challenging situation.
The best home insurance company is different for everyone and depends on your specific needs. Most homeowners insurance policies provide actual cash value coverage for your personal property as the default. Still, most insurance companies also offer the option to include replacement cost value coverage for personal property at additional cost. Consider what you need and what you are trying to protect, then try speaking with your insurance company to see what will work best for your situation.
If you have decided that you would like replacement cost value coverage for your personal belongings, contact your home insurance company. You will probably be able to make this change over the phone, but some insurance providers also allow you to update your coverage online.
Whether you have ACV or RCV coverage for your personal property, the process starts by filing a claim after a covered loss. Call your insurance provider or fill out their online claim form to begin the process.
You might want to take pictures of any damages to document the damage and help verify which items you need replaced or repaired. Secondly, it might be a good idea to save receipts for any replacement items you buy. Your insurance provider may need to see those, particularly if you have replacement cost insurance.