What’s ‘actual cash value,’ and why is it important?

No one wants to think about the possibility of having their home destroyed. But that tragedy could come with an added dose of grief if your claim settlement falls short of your expectations.

Let’s say you bought a house 10 years ago and insured it for $150,000. Your house’s market value may have gone up, as may the cost of rebuilding your home. But a home insured for actual cash value (ACV) will only cover the cost of repairing or replacing your home minus depreciation, which is the lowering of value due to time as well as wear-and-tear.

The same principle applies to your personal belongings inside your home. Let’s say your bouncy beagle knocks a candle off your coffee table, starting a small fire. It’s quickly extinguished, and both your dog and your family are OK. Your leather couch? Not so much.

That’s what insurance is for, right? So you start surfing the web looking for a new leather couch to replace the one that got toasted. You may be planning on getting back the original amount you paid for the couch three years ago. But if your personal belongings are covered on an ACV basis, you’ll only get the original value of the couch minus depreciation.

What’s the solution?

To make sure you don’t get a nasty surprise if you have a loss, talk with your insurance representative about covering your home for its replacement cost.

You actually have two ways of getting this done:

  • Request a coverage amount for your home based not on its market value or purchase price, but on estimates for what its true replacement and repair costs would be. Your insurance representative may have software that can help you determine this amount, or they may suggest that you have a local contractor come do an in-home estimate.
  • Talk to your representative about adding a replacement cost endorsement to your policy, which explicitly states that your home will be repaired or replaced without a reduction in payment for depreciation (provided the conditions of the policy are met).

One more suggestion — talk to your representative about endorsements that insure your personal belongings for their replacement cost, not their ACV. You can even check into endorsements that specifically cover individual, high-cost items — think jewelry, fine art or pricey tech equipment.

Keep the different ways insurance companies determine value in mind, and get all the details from your representative. There’s no replacement for knowing what you’re in for.



WBTL-0751 (Apr. 19)

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