Home insurance costs are going up due to rising home prices, rising building costs, increasing natural disasters, and less appetite for risk from the insurance and reinsurance companies. As a result, more homeowners are looking to save by taking out an actual cash value (ACV) home insurance policy as opposed to the more common replacement cost value (RCV) home insurance policy.
I'm going through this dilemma right now as I diligently hunt for a home insurance policy for a new home I plan to buy. The actual cash value policy I found is about 52% cheaper than the best replacement cost policy I've found. With such significant annual savings, I'm leaning toward the actual cash value option.
Let me explain the definitions of each home insurance policy and discuss why one may be better than the other. Ideally, a homeowner needs disaster insurance in case the worst happens, such as a fire that destroys everything.
First, let's review what depreciation means. It is key to understanding the difference between replacement cost and actual cash value. In simple terms, depreciation is the loss of value of your property over time.
Replacement cost is the amount paid to replace property or personal belongings without any deductions for depreciation. You may also have the option for replacement cost value on automobile, motorcycle, and boat policies.
Actual Cash Value Home Insurance Policy Definition
Actual cash value is equal to the replacement cost value minus depreciation. In other words, an actual cash value home insurance policy does not replace what you lost. Instead, it reimburses you for the item's CURRENT actual value.
For example, your roof might have cost $30,000. However, since it's 15 years old and only has a useful life of 30 years, the current value of your roof might only be $15,000. If your roof tears off during a tornado, your actual cash value home insurance policy would just pay $15,000.
How is the current value of your roof determined? To determine an item's ACV, an insurance adjuster will take the cost of replacing your damaged or stolen property and reduce the cost of the property based on depreciation, such as age and wear and tear.
Therefore, the older your house, the less an actual cash value policy will likely cover.
Replacement Cost Value Home Insurance Policy Definition
Replacement cost value (RCV) is what it costs to replace damaged or stolen property without depreciation. It doesn't matter how old the item is. A replacement cost value policy is obligated to replace the item at whatever it costs today.
Going back to the roof example, if you have an RCV policy, then your insurance company would pay for the full cost to replace your roof. The roof cost $30,000 fifteen years ago, but it may cost $60,000 today thanks to inflation. With an RCV policy, you would receive the full $60,000 to replace your roof with a similar quality roof.
An insurance adjuster will likely still come out to assess the damages before approving your claim. But, the insurance adjuster won't be trying to calculate the depreciation of the damaged or destroyed property. Instead, the adjuster is there to verify the extent of the damage and identify vendors that could do the replacement job at a reasonable price.
Why You Might Prefer A Replacement Cost Value Insurance Policy
Most people get replacement cost insurance for greater peace of mind. If the worst happens, an RCV policy will replace your home and belongings in case of disaster without the need to pay more out of pocket.
If you don't have a lot of savings, a replacement cost value policy provides greater financial protection. Valuable personal items, such as rare books or ancient Chinese coins, should likely also have a replacement cost value policy. There is likely a lot of subjective leeway in terms of valuing collectibles and memorabilia.
Certain rare items actually gain value over time. These items will need special treatment in your insurance policy to make sure they’re covered for their full value. You may need to purchase additional insurance and name each item.
If you are in a lot of debt, a replacement cost value policy may also be comforting to prevent you from getting into more debt. In fact, in order to qualify for a mortgage, a lender may require you to carry replacement cost insurance. Unless you pay all cash for a home, you may have no choice but to get an RCV policy.
In these cases, it’s better to pay the higher premiums each month than deal with a worst-case scenario and an insurance adjuster who nickels and dimes you. No-one wants to lose everything, be unable to replace items, and wind up homeless.
Why You Might Prefer Actual Cash Value Home Insurance Policy
For homeowners who have lots of savings and strong cash flow, getting an actual cash value home insurance policy can make sense. ACV premiums are much cheaper.
Most home insurance claims are not for complete rebuilds or replacements. Instead, most home insurance claims are for partial damages that come nowhere close to the full Dwelling A, B, or C coverages.
Alternatively, if a homeowner has weak cash flow and/or not a lot of savings, they may elect to get an ACV policy to save on monthly insurance premiums. This situation is obviously riskier, but can pay off if nothing bad happens to the home.
For homeowners who have another property to live in in case of an accident, getting a cheaper actual cash value home insurance policy may make sense too. Although, Coverage D, which is Loss of Use, should be available for both types of home insurance policies. Loss of Use is the amount a homeowner gets to rent a comparable property while their damaged home gets fixed.
Actual Cash Value vs Replacement Cost Value Price Differential
After hours of talking to various home insurance agents, it is clear that an actual cost value policy is cheaper than a replacement cost value policy. My quoted RCV policy is about 100% more expensive than my quoted ACV policy. However, it's not entirely apples-to-apples because the RCV policy has 60% higher Dwelling A coverage.
Therefore, for most homes, I estimate the cost of an actual cash value policy is about 30% cheaper than the cost of a comparable replacement cost value policy.
There's a reason why some of the largest companies in the world are insurance companies. Insurance is a highly profitable business. The insurance premiums collected are usually more than what insurance companies must pay out in claims. Further, there is a robust reinsurance market which helps offload risk for primary insurance companies.
In summary, ACV = Lower price, RCV = More coverage.
The Basics Of Home Insurance Coverage
Below is an example of a home insurance policy with various coverages. The main focus for ACV and RCV policies are with Coverage A: Dwelling, Coverage B: Other Structures, Coverage C:
Coverage A: Dwelling, AKA Physical Structure
Your home is covered under your dwelling coverage (also called “Coverage A”). The amount of dwelling coverage is usually based on the cost to rebuild your home. The cost to rebuild your home is usually calculated based on a price per square foot. Most standard home insurance policies cover your home at replacement cost value.
Dwelling coverage is what most people think about when getting home insurance. The tricky thing when it comes to having an actual cost value cover dwelling is how much depreciation goes into physical structures, like walls, plumbing, electrical wiring, etc.
Ask the home insurance agent to clarify depreciation of a home's physical structure. And have them provide various scenarios.
For example, let's say your house burns down and you have an ACV policy for $1 million Dwelling A. If your home was gut-remodeled 10 years ago and costs $1.4 million to rebuild, how much of the ACV policy will cover to rebuild? Hopefully the full $1 million plus $400,000 out of your pocket.
Coverage B: Other Structures
Another reason the price point of Coverage A is important is because all of the other Coverage limits are set by the Coverage A limit.
Other Structures coverage might be a 10% maximum of your Coverage A. For example, if you have a $1,000,000 Coverage A limit, you get $100,000 for Other Structures.
Other structures include patios, external fireplaces, fences, and the outdoor kitchen. With other structures, it is less risky to get an actual cash value policy because the items are less expensive.
Coverage C: Personal Property
Anything that can fall out of your house if it is turned upside down is what's covered by Coverage C.
When insuring your belongings, you may choose between ACV and RCV. Most insurance policies provide coverage on an actual cash value basis. But for an added cost, you can often purchase replacement cost coverage.
For example, if you paid $3,000 for a new recliner 10 years ago, and it got destroyed in a fire, the RCV option would typically pay what it costs to replace your recliner, which is likely more than $3,000 today, minus your deductible.
If you have personal property that tends to appreciate in value, you may want to get additional personal property insurance. Tell your independent insurance agent if you own any of these items:
- Valuable art such as sculptures or paintings
- Precious metals and gems
- Rare signed books
- Firearms
- Fine jewelry
- Antiques or heirlooms that you think could be valuable
Extended Replacement Cost For Home Insurance
Again, most homeowners think about Coverage A: Dwelling, when it comes to insuring their homes. Many insurance companies provide an “increased replacement coverage” option that increases Dwelling A coverage by 25% to 50%.
For instance, if your home's dwelling coverage is $1,000,000 and you bought an extra 25% in increased replacement cost coverage, you would have up to $1,250,000 in dwelling coverage. Calculate the incremental cost and see if it's worth it to you.
Please be aware the increased replacement cost is intended to cover increases in the price of construction and not upgrades. For example, if a wildfire destroys your town and your home, the cost of materials and labor will likely increase. As a result, the increased replacement coverage is there to protect you from the increased cost of rebuilding your home.
Guaranteed Replacement Cost For Home Insurance
Let's say for some reason, the cost to rebuild your home surpasses the extended increased replacement cost coverage. Your home insurance company might offer a guaranteed replacement cost option, which pays the full cost of replacing your home/property.
Unlike increased replacement cost, there is no specific limit for the additional coverage. However, insurers typically cap guaranteed replacement cost at 20% above the amount of your home's insured value.
Why I'm Leaning Toward An Actual Cash Value Policy
I'm leaning toward getting an actual cash value home insurance policy because mine is 50% cheaper than a replacement cost value home insurance policy. Over ten years, I will save around $28,000!
I've owned real estate for over 20 years and I've never once had to file a home insurance claim. It's not so much that I was lucky. It's more so the home insurance deductible was high enough that filing a claim wasn't worth it. And if you successfully file a claim, your home insurance premiums may then go up.
Examples Of Property Damage Where I Didn't File An Insurance Claim
For example, when I was a renter, my laptop got damaged because water leaked on it from the unit upstairs all night. The deductible was $1,000 and the computer was worth maybe $1,200. So I decided it wasn't worth filing a claim due to the hassle.
When I was a homeowner, I used a tub deepener so I could have a deeper soak. Bad idea! The water overflowed and leaked through my dining room ceiling below. Instead of filing a home insurance claim and paying the $5,000 deductible, I hired guys for $3,000 to open up the ceiling, identify the cause of the leak, and fix everything.
Based on my 20+ years of experience owning multiple properties, home insurance has been a waste of money. However, home insurance provided me peace of mind. It was also required for most of my properties given I took out mortgages.
Of course, home insurance would have been hugely valuable if my house burned down. Luckily I have not faced any disasters just yet.
As a landlord, home insurance is important for my rental properties because I'm not in control of what my tenants do inside. They could be leaving their space heater on all week while they go away on vacation for all I know.
Therefore, I feel like home insurance is more worth it to rental property owners. In fact, I require all my renters to get renters insurance before moving in.
What Bothers Me Most About Actual Cash Value Policies
If something bad ever happens to your home you will feel stressed. To then have to deal with an insurance adjuster who will calculate the depreciation of your damaged property will make you even more stressed.
No matter what the commercials say about how nice insurance agents are, the insurance adjuster's goal is to save the insurance company as much money as possible. The more the insurance company saves, the more profits it will make.
Whereas with a replacement cost value policy, there should theoretically be less debate after filing a claim. If the item is destroyed, then it must be replaced at whatever it costs today. This type of peace of mind is valuable, especially if you don't have a tremendous amount of savings or tappable liquidity to cover non-covered damages from an ACV policy.
If I knew the ACV policy insurance adjuster was a good guy, then I'd be more inclined to go with an ACV policy. But all of us likely have no idea who our future insurance adjuster will be.
If the cost spread between my quoted ACV policy and RCV policy was 30% or less, I'd lean towards the more expensive RCV policy instead.
New Construction Or Recently Remodeled Homes May Want Actual Cash Value Policies
There is less depreciation to reduce the actual home insurance payout for newly constructed or recently remodeled homes. Therefore, those with newer homes should get better value from a cheaper ACV policy if something were to happen to their home.
Hence, one money-saving strategy is to get an actual cash value home insurance policy for the first 15-20 years of a new or remodeled home's life. Then switch to a replacement cost value home insurance policy after 15-20 years. This way, if something were to ever happen to your now much older home, you get all your old items replaced at today's much higher values.
This strategy is safer than going without home insurance for 15-20 years and then getting insurance. This strategy also reminds me of the strategy of getting married after decades of being together. This way, if one spouse dies, the other spouse will be able to collect survivor's Social Security benefits. Before getting married, the couple may have saved tens of thousands in marriage penalty tax.
The Hedge Against Bad Or Expensive Home Insurance
Finally, one way to overcome feeling bad about paying a lot for home insurance or getting poor home insurance coverage is to buy the insurance company's stock.
I have utilized this strategy with health insurance providers since 2012 when I had to pay 100% of my health insurance premiums after I left my job. UnitedHealth Group (UNH) has been a juggernaut since 2012. Hooray for gouging my family and others!
The next time you have to pay your home insurance premium, as an investor, feel better knowing that some of the money is going to the insurance company's bottom line. As a shareholder, that's what you want as it increases the stock's chance of appreciating in value.
If you can't beat them, join them!
Whatever you decide between a cheaper actual cash value policy or a more comprehensive replacement cost value policy, make sure you fully understand what each policy entails. Ask the insurance agent questions and offer up scenarios where you would have to file a claim.
It is more than likely you will not have to file a home insurance claim during your homeownership duration. However, during the one time that you do, you will be thankful you have the appropriate home insurance coverage.
Reader Questions and Suggestions
Anybody opt for an actual cash value home insurance policy over the more common replacement cost value home insurance policy? If so, why? Have you ever experienced difficulty filing a home insurance claim? If so, what was the issue? Which do you think is a better home insurance policy: ACV or RCV?
In addition to getting affordable home insurance, I highly recommend getting life insurance. If you have a mortgage and/or kids, getting a term life insurance policy is a must. You must protect your dependents in case something unfortunate were to happen to you. Both my wife and I got matching 20-year, $750,000 term life insurance policies with Policygenius.
Simply fill out your information on Policygenius and it will come back with customized real life insurance quotes for you. I had been searching for years for an affordable policy, and Policygenius shopped around for me. After we got our policies, we felt a tremendous sigh of relief that our four-year-old and six-year-old will be taken care of if something were to happen to us.
Listen and subscribe to The Financial Samurai podcast on Apple or Spotify. I interview experts in their respective fields and discuss some of the most interesting topics on this site. Please share, rate, and review!
Join 60,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail.
What surprised me about the cost of rebuilding after a complete loss is that it may cost more than the current value of the home ( including land value). Why, as explained to me was that you are building a custom one off home in an existing neighborhood ( no matter how basic your home may be). The builder has none of this savings that go with building many homes on virgin land. Lots of constraints on the builder, higher building code, etc. So the rebuilding cost has almost no relation to the original houses market value.
Great perspective. Thanks.
Guaranteed replacement cost does Not include the lot. It only insures the structures.
In terms of the lot.. the lot almost always stays intact, unless a flood washes it away right?
Insurance companies are the biggest scam. In Florida, most have refused to pay full cost of repairs after last years hurricane, meanwhile insurance rates have doubled, even for those who have never had a claim. People are actually moving out of state.
Great discussion! I go thru this every couple years when looking at our policies. We own several rentals, only 5 have ACV the rest of RCV. It has to do with location. For those 5, the cost was double for ACV. We save all our cashflow, and have a significant cushion to cover ourselves, plus umbrella insurance for other issues.
It’s all about what helps you sleep at night.
RCV policy premium was double ACV policy premium you mean?
Perfect timing! I’m just in the process of getting a new condo policy, and there are so many points to consider. As a condo owner in NYC, I’m now wondering if my building is adequately covered for full loss as well. We already had one fire when someone’s external HVAC unit caused an electrical fire on the roof. The fire department came quickly, but then there was significant water damage in the building. Having a contractor work with the insurance company was key since they got us the full repair cost. Thanks for your helpful article!
Insurance adjusters are not on the customer’s side.
In 2009 I had a 300C that was hammered by golf ball sized hail and while the majority of the damage was repaired through paintless dent repair, the hood had 17 dents in it and, being aluminum, it had to be replaced. But the State Farm adjuster at the time refused to acknowledge that the hood needed to be replaced and instead wanted the body shop to putty the dents and paint over them, which is not a proper repair because the aluminum would flex and eventually break the putty and the paint loose.
So the body shop and I talked about it and waited a few weeks until the primary State Farm adjuster went on vacation and then re-submitted so a substitute adjuster reevaluated the claim and approved the hood replacement.
State Farm lost over 11 years of premiums after that because I dropped them for Erie until I needed transportation network coverage for food delivery, so I switched back. Since then have I found them to be fine to work with during repairs from a 2022 collision.
Get RCV no matter what on a property. There’s no need to deal with an adjuster whose paycheck might depend on lowballing a claim.
I have extensive and recent experience in this. My wife and I bought a house in Nov 2020 in the Boston area, planned on moving in March 2021. During a bitter cold spell, the water pipes sitting on the floor of an uninsulated attic burst, destroying most of the home. It was so bad, it was gutted to the studs and rebuilt. Here are a few insurance points you have missed in this otherwise excellent article:
1. Adjusters: don’t think you’ll have 1 adjuster throughout the rebuild process. Lot of turnover. We had 4 adjusters over a period of 11 months, in this order: excellent, dumba$$, hard to reach, very good.
2. General contractors: better pick a good one, and one willing to work with the insurance co. Our 1st adjuster actually got us the GC which had a lot of experience with the LiMu Emu. I wondered who the GC might be more beholden to, but it worked out. Sometimes the Emu would pay directly to the GC, sometimes to me.
3. Milestones: insurance companies look for milestones to fork over the dough, usually around inspections. We had 6: rough elec, rough plumbing, insulation, final elec, final plumbing, overall house. The Emu was generally very good with payments, but I can see this being a real pain and a point of much delay.
4. Building codes: Much of a rebuild is about getting various systems back up to current codes. If your house was built in the 20th century, better hope you have RCV that will cover getting up to code. This can be a huge cost.
5. Housing: You have to live somewhere while the rebuild happens, and you DON’T want to be in a hotel or Motel 6 for the duration! Fortunately, our 1st adjuster got us into a modern apartment which we actually loved! We were lucky,
6. Time: Much of your time will be waiting for the numerous sub-contractors to show up which in our case, added 40% to the time, which took 11 months in total
One other thing to consider: Mr. Samurai, you live in SF and the Big One is coming. If that hits, you will be one of hundreds, if not thousands of homeowners waiting on a small pool of GCs. That will likely double or triple the time to completion. Just look at the experiences of folks in Coffee Park, Santa Rosa. If that happens, rent another house/apt!
For me, I’m so glad that I had RCV. The Emu paid for almost everything (over 200K), and now we have basically a brand new home on their dime.
Such great feedback! Thank you for sharing. How much money did the insurance company spend on you renting a comparable place in the meantime?
Sounds like you got very unlucky with the pipes. What do you think you could’ve done differently to a prevented the pipes from bursting?
I’m constantly thinking about preventative maintenance before the winter especially.
The retail cost of the apartment was around 2700/mo plus about 500/mo for having it furnished. In all, it was almost a quarter of the total cost for the rebuild project. The insurance co. paid for it directly to the apt company.
In cold climates, when there is a severe cold snap, such as below <= 10 degrees for more than a couple of days, one is supposed to 'drip the faucets', just to keep the water flowing in the pipes to prevent freezing. The nightly news always reminds us to do it. The idiot property mgmt company that we hired prior to arriving didn't do that, and since it was unoccupied, the water remained still and subject to freezing.
But it will never happen again for 2 reasons:
1) All the new piping, as per building codes, is made of PEX, and pex has the ability to expand if frozen (up to a certain point) as opposed to older copper or old style polyvinyl pipes.
2) The big fix is this: I had the rafters of the attic insulated with foam roofing, which is awesome. Now the attic, where the pipes are located, is within a degree or two of the living area. Cost me about 10K for the roof and walls, out of my own pocket.
Great there is a solution. And good to know about PEX.
Water damage is consistently one of the worst and most annoying.
What a helpful article! THANKS
Aah, makes so much sense now. Thanks for clarifying the differences between ACV and RCV. Insurance stuff can feel so daunting until you actually break it down and familiarize yourself with the different types and options. I haven’t done a total gut remodel before, but if I ever do I will highly consider switching to ACV for 5-10 years. And love your tip on buying stock in the insurance company, ha!
Damnit Sam! After the Hawaii fires and your last post on insurance I called my insurance agent to see if I’d be fully covered in case of a total loss. I wasn’t. I added the 50 percent extra dwellings coverage and increased my other structure coverage as well. Now I have to find out if I have ACV or RCV coverage! Oh well.
Thanks for bringing up this subject. I’ll end up paying more but at least I’ll know I’m fully covered if anything happens. Much better than hoping I am which was my previous strategy.
At least you called and found out! Knowing is more than half the battle here.
I’m assuming you have RCV coverage. Let me know what you find out.
Love the hedge idea by buying stock in your insurer – as long as you think they run a good business. And assuming they’re publicly listed, not all are. I’m a big fan of buying stock in companies that have a great product and treat me right as a customer. I’ve found some of my best [stock] buy’s that way, including Apple, Intuit, and Zoom (that ended up being a loser, but it was up for a good duration before I sold to harvest the loss; still a happy customer though!). Conversely, I have also sold out of positions when I was not happy as a customer of a company, goodbye Ford and Disney! I wish Chick Fil A would go public – I love it when I get my food and they say sincerely “it’s been a pleasure to serve you today, sir”.
I’m shocked Disney is close to a 10-year low. Such a strong brand that has failed to capitalize.
Business is tough!