RCV stands for “replacement cash value.” ACV stands for “actual cash value.” Both of these are options for homeowners and renters’ insurance.
The RCV vs ACV difference is based on the benefit being paid in both policies. If you have an RCV renters’ insurance policy or home policy, then you will be paid enough, less any deductible, for the actual cost to replace the item that was lost, stolen, or damaged.
If you have an ACV renters’ insurance policy or home policy, then you will be compensated for the actual cash value of the item that was lost, stolen, or damaged. That means depreciation is calculated into the final value of the item. You would then be required to pay the difference when purchasing a replacement.
How RCV and ACV Works with Insurance
As an example, let’s say that you purchased a beautiful dining room table that seats 8 when you moved into the home where you now live.
The combined cost of the table and the 8 chairs is $3,000 when you made the purchase.
Now 5 years go by. That dining room set is no longer worth $3,000 because you’ve been using it for the last 5 years. Even though it is in good shape, the resale value of the furniture is now $700.
If you have an RCV insurance policy, either homeowners’ insurance or renters’ insurance, then you’ll receive $3,000 (or more) to purchase the same dining set or something similar. Even though you’ve used the other dining room set for 5 years, you’ve insured the full value of a complete replacement with RCV.
If you have ACV insurance instead, either homeowners’ insurance or renters’ insurance, then you’ll receive the current cash value of the furniture at resale, which is $700 in this example.
Any deductible you would be required to pay for the claim would be taken out of this figure. If you had a $500 deductible and the claim was for the dining room set only, then an ACV payout would be just $200. With an RCV payout, you would receive $2,500 or more, depending on the final cost of a suitable replacement.
Why RCV Is Different with a Homeowners’ Policy
Homeowners’ insurance and renters’ insurance has one key difference when comparing the two types of plans. Both policies will cover your personal belongings if you wish, as well as the structure of the home.
With an RCV homeowners’ policy, the structures of your home would be covered should damage occur to the property. Although flood insurance is not usually covered, any other qualifying event would allow the homeowners to receive enough in funding to repair or replace the home to its previous state. In most situations, the payment would be issued to the homeowners, although some may prefer to issue the check to those who are hired to complete the repair.
From a renters’ policy standpoint, the actual coverage with RCV is the same. The actual cost of replacing or repairing a home would be paid out with a qualifying event. Instead of receiving the payment, however, the owner of the home would be given the compensation instead after a claim is successfully processed.
Then the property owner would be able to initiate the repairs or replacement work that is necessary to complete the work.
What is unique about the renters’ policy is that any form of damage can be covered. If a renter causes flood damage, accidental damage, or burns the house down, the renters’ policy (if these acts are covered) would pay out the RCV. For a homeowners’ policy, even an accidental flood, like a burst pipe from a washing machine, might not be covered because it creates a specific type of damage.
You’re not required to obtain a home inspection when purchasing a renters’ RCV policy either, whereas a homeowner would be required to do so. Some policies may require multiple home inspections to create an average value cost, which the homeowner may be required to pay for to have this policy created.
Why ACV Is Different with a Renters’ Policy
Many homeowners will opt to have an ACV insurance policy because real estate tends to appreciate in value instead of depreciating. That means the actual cost to replace a home might be higher than the RCV in a hot housing market. At the same time, most ACV policies cost less than an RCV, so you can get a reasonable amount of coverage without taking a huge hit to the budget.
In a renters’ policy, an ACV policy might not be allowed by a landlord. That is because the renters’ policy would only pay for the actual cash value of what was damaged. Most damage occurs in rentals within the interior of the home. Many rentals have older appliances that may have depreciated out of their value.
With an ACV renters’ policy and 20-year-old appliances, the landlord might not receive any compensation for the damage. That would force the landlord to collect damages from their tenants or pursue an eviction, which creates costs that may be difficult to recoup in the short-term.
Cost Differences Between RCV and ACV
If you are renting, then your renters’ insurance payout will provide you with compensation for items you own if they are destroyed or stolen. That allows you to be made whole when you’re able to replace the items.
It is important to carry RCV for structures when renting because you could be held liable for any damage to the property that falls outside of the insurance coverage. If you caused $50,000 worth of damage, but the ACV policy you carry only covers 50% of that cost, then the landlord could pursue you for the other $25,000 that they are out (or other actual costs they must pay) to be made whole.
The element of depreciation does come into play here. If you’re renting a home that was built 20 years ago, has carpet that is 10 years old, and the countertops and tile are all original, then being made whole from the landlord’s perspective means replacing the value of the depreciated items. It is not usually a renter’s responsibility to pay for brand-new items if the damaged items have fully depreciated.
It can be in some jurisdictions, however, which is why it is important for damage riders to be RCV instead of ACV in most circumstances.
Renters should always ask for RCV when they are insuring their personal items. If you purchased a $1,500 iMac computer, receiving $750 for it should it become damaged will not give you the replacement you want.
RCV policies, both renters’ and homeowners’, will be more expensive than ACV policies. With renters’ insurance, the difference in cost may be as little as $5 per month. To know which option is better for you, make an inventory of all personal items in the home to see what the costs for both policies would be.
For homeowners’ policies, the goal should be to make yourself whole should something happen to your property. You might find that the full value of an RCV policy may not be enough under certain circumstances. That’s why it is important to speak with your insurance agent about adding value extensions or riders that would cover more.
If you own a $250,000 home and carry an RCV policy, you might choose to add a 10% value extension rider. Should you need to file an insurance claim, then you’d receive an additional $25,000 on a full payout over the $250,000.
Deductibles and Insurance Policies
A deductible is an amount that you must pay when a claim has been authorized. The amount of the deductible is set when you first agree to the policy. Under most circumstances, the deductible will come out of the insurance payment that is authorized once the claim has been processed.
Let’s say you’re a renter or a homeowner who has $10,000 in expenses that are authorized for payment after an approved claim. If you have a $1,000 deductible with your insurance policy, then your insurer would pay $9,000 to resolve the claim.
There is another type of deductible that may be on some homeowners and renters’ policies as well. Some policies come with a percentage-based deductible, which requires the homeowner to pay a specific amount of the RCV or ACV claim.
On a full $250,000 claim, a homeowner with a 10% deductible would see $25,000 less in funds with an approved claim. With a $1,000 deductible, the homeowner would receive $249,000.
Choosing which type of deductible to use, and how much it should be, reflects the risks you’re willing to take. If you want to guard against short-term loss, then you’ll pay more for lower deductibles. If your preference is to have disaster protection only, then you might opt for a higher deductible to save on costs, especially if you have a nest egg saved away.
Insurance can be a complex subject. This information is intended as a guide only. You must consult with a professional agent to determine which side of the RCV vs ACV debate your situation fits best into.