Few people enjoy watching their money go toward insurance premiums. Yet, all it takes is one massive snowstorm, like those tearing across much of the United States from Arizona to the Atlantic Ocean, to warrant contacting your home and auto insurance providers.
Like a tree burdened with snow falling on a back porch or cars colliding from sliding along an icy road, loss events raise a lot of questions one needs to ponder when it comes to repairing or replacing your damaged items.
When insurance companies are involved, it becomes a bit trickier. You will have to navigate between understanding the replacement cost value (RCV) and the actual cash value (ACV) of the damaged item in question — both carrying different fiscal disadvantages and advantages.
Below we’ll dive into four instances when you should think twice before choosing a policy that provides replacement cost value coverage.
4 times you should consider taking actual cash value
Auto and homeowners insurance providers alike can compensate you for covered losses in one of two ways: actual cash value of the covered property or replacement cost value of the property. Replacement cost insurance often leads to higher premiums. So, if you’re living on a budget or don’t have valuable items, you may want to choose an actual cash value policy.
Where auto and homeowners insurance policies differ is that homeowners insurance typically includes a mixture of actual cash value and replacement cost value within the standard policy. For the physical structure (your house), most insurance policies give you the replacement cost value. However, the property within your home is usually covered under an actual cash value policy.
1.Choose actual cash value to lower your premium costs
Each state has a legal minimum amount of auto insurance coverage required for car owners. Your auto insurance provider likely provides actual cash value through your minimum liability coverage but won’t provide replacement costs. Also, liability coverage does not cover damage to your own vehicle. If you want replacement costs for loss events such as vandalism or car theft, you’ll need to purchase comprehensive insurance.
Paying higher premiums to get replacement costs may not be worth it to you, especially if you have a reasonable amount of money saved to cover an incident. Additionally, living in a lower-crime city or state where accidents and loss events are rare may mean your likelihood of having to use comprehensive insurance is reduced.
Do your own risk assessment before adding comprehensive coverage to your car insurance policy. The long-term cost may not be worth it based on your risks and the value of your car.
2.Take actual cash value coverage for older vehicles
A comprehensive insurance policy has depreciating value; the older your car gets, the less beneficial the coverage becomes as the actual cash value and replacement cost value become equivalent. If you own an older car, there’s likely little reason to spend extra money on comprehensive coverage. You’d pay far more in comprehensive premium costs than you’d get back through a claim.
Consider the current value of your vehicle. There’s no magic number here, as vehicles depreciate at different rates. Check the Kelley Blue Book value of your car, and see how much lower its value might go. Many older cars have close-to-equivalent actual cash and replacement cost values.
3.Take actual cash value if you don’t own expensive property
This one is a simple calculation. If your furniture and other personal property are inexpensive, the replacement cost values are not going to get you very far. Your insurance company may only give you $100 in ACV for a TV that you purchased for $150, but you’d hopefully have money saved to cover the gap between the actual cash value of the item and the cost to replace it. This is, of course, keeping in mind that coverage for damage to the physical structure of your home is typically based on the replacement cost. Unless you own very expensive furniture and TVs, the added expense of replacement cost coverage for your personal property items likely won’t be worth it in the long term.
4.Take actual cash value if you live in a low-risk region
Your risk of experiencing loss events should be a factor in your decision. As with car insurance, you may want to opt for actual cash value if you don’t live in an area that’s prone to the type of loss events that put your property at risk. For example, if you live in a part of the country where events such as fires or blizzards are rare, you’ll have far less risk. And if your home is not surrounded by trees, the risk of a tree breaking through your roof and damaging property is nonexistent. The same is true of crime risks, as well. If you live in an area where property theft is rare, this should also factor into your decision.
Risk assessment is not just the responsibility of your insurance provider. The more coverage you purchase, the higher your premium costs will be. Not every situation requires the added cost that comes with replacement cost insurance. Examine your individual situation with your vehicles and personal property. If cheaper premiums make more sense considering the value of your property and your risks, consider limiting your spending and choosing the cheaper policy.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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