BY SOLO INSURANCE®

Homeowners Insurance RCV or ACV?

Getting a mortgage means getting homeowner insurance. Homeowner insurance options include Replacement Cost [RCV] or Actual Cost [ACV]. What you get can make a big difference if you need to use it.

Most people do not have the money to pay for a new house in-full at the time that they buy it. As a result, they will usually take out a mortgage or other financing to finalize the purchase. When you finance your home, you will have to repay the loan to the bank over a period of years. During this time, the bank has an investment in the property. So, if something happens to your home, then you are not the only party who might lose out financially. Your lender will also still expect to be repaid their mortgage, even if a tornado were to destroy your home. It is currently that your need for homeowners insurance is critical.

Most mortgage lenders require property owners to purchase homeowners insurance. At this time, you must carry coverage that meets the lender’s expectations. Usually, they will institute a replacement cost value (RCV) dwelling coverage requirement on the property. Here is how it and its counterpart, actual cash value (ACV) coverage, work.

Homeowner Insurance Basics-Replacement Cost or Actual Cost

According the National Association of Insurance Commissioners:

“When it comes to buying an insurance policy and filing claims, you’ll want to be aware of the difference between replacement cost and actual cash value. If you have Replacement Cost Value (RCV) coverage, your policy will pay the cost to repair or replace your damaged property without deducting for depreciation.  If you have Actual Cash Value (ACV) coverage, your policy will pay the depreciated cost to repair or replace your damaged property. ”

1. Replacement Cost Value Coverage (RCV)

A RCV homeowners insurance policy insures your dwelling based on the price it will cost to rebuild, at today’s rates. Replacement cost value is not the sticker price that you paid for the dwelling and the rest of the property. Instead, it is the value of the house itself, which is different from the price of the property, even though it is the most substantial part of your property value in most cases.

The benefit of RCV coverage is you will be able to repair or rebuild a damaged home to the way it was before the loss occurred. However, the drawback is that you will need to periodically clarify with your agent that your coverage is still adequate, given that construction and replacement costs often change.

2. Actual Cash Value Coverage (ACV)

An alternative to Replacement Cost Value coverage is Actual Cash Value coverage homeowners insurance. This is the less common type of coverage in dwelling insurance. In some cases, it is the only type available (such as with a vacant property). As the value of a dwelling decreases over time, such as due to age, remember an ACV policy pays only based on the value of the house at the time of the loss. This is far from adequate when it comes to rebuilding an entirely new home or making extensive repairs. These policies are seldom offered to consumers today for their primary homes.

To understand ACV in another way, car insurance’s Comprehensive and Collision coverage are ACV. The value of a vehicle at the time of the loss is calculated in order to calculate claim payouts, not the purchased new price.

Once your lender tells you what type of coverage they require, your insurance agent will be able to help you design the right benefits. RCV policies are by far the best coverage to carry, and your agent can ensure that you receive the right balance of benefits for your needs.

Recap

Whichever type of coverage fits your situation best, RCV or ACV, lenders require insurance. Whether homeowner or car insurance, replacement cost and actual cost valuation principles apply.