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The Difference Between Actual Cash Value and Replacement Cost Value on your Home Insurance Policy

Home insurance... most homeowners have it — especially if you have a mortgage involved (it's required). But if we're being honest, do we all really know the ins and outs of our Homeowners Insurance policy?

If you're like most people, then the answer is no. So then what happens if there is an issue with your home or property? The two most common types of coverage for home insurance are actual cash value (ACV) and replacement cost value (RCV). Let's review what they are and how they are different.

Actual Cash Value vs. Replacement Cost Value

Actual Cash Value (ACV)

Under this provision, your insurance pays based on the amount you paid for the damaged property at time of purchase, plus depreciation. This applies to the home itself and your possessions.

Let's say you paid $1,500 for your refrigerator four years ago, and once you factor in depreciation, it's now only worth $700. Based on ACV, the insurance company will write you a check for $700 (don't forget about your deductible). So the bummer is that after depreciation and your deductible, you may only end up with a few hundred dollars to purchase a new refrigerator — instead of the full amount you originally paid.

Replacement Cost Value (RCV)

This is the recommended option as it puts the homeowner back as close to their original living situation before the incident as possible. True to it's name, under this provision, your insurance coverage will replace damaged or stolen property with new items.

So in the case of your home, if something catastrophic were to happen — under RCV you would be reimbursed at an amount comparable to a home in today's market. Although you will still need to consider your deductible, you will be much better off than you would be with an ACV provision.

Home Insurance Policy ACV vs. RCV

It's hard to think about anything bad ever happening to our things or our homes. But taking a little extra time to understand your policy's coverage will greatly benefit you in case you ever need to make an insurance claim. Knowing what to expect is always comforting. And nothing beats the peace of mind that comes with being prepared and knowing your home is protected.

Interested in learning about more ways to protect your home? Here are 8 Ways to Protect Your Home and Save After Closing.

Want even more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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