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Actual Cash Value vs. Replacement Cost Renters Insurance

Your renters insurance will cover your belongings at actual cash value or replacement cost. Here’s the difference, and how to choose the right policy for you.

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How renters insurance covers your belongings after a loss depends on whether it is an actual cash value or replacement cost policy. Knowing the difference can help you better understand your coverage and what to expect after a loss.

Actual cash value vs. replacement cost

Actual cash value (ACV) and replacement cost (RC) are not unique to renters insurance — they apply to other residential insurance like homeowners insurance and condo insurance. For renters, ACV and RC matter for your policy’s personal property coverage, which is the section that details how your policy covers your belongings.

Replacement cost

Replacement cost insurance policies reimburse you based on the amount of money needed to replace a damaged item with a new one of similar value and quality. Replacement cost policies are occasionally referred to as RC or RCV policies.

For example, imagine a kitchen fire destroys your kitchen equipment. Buying a new blender, coffee maker, microwave and utensils won’t be cheap. If you have a replacement cost renters policy, your renters insurance company would reimburse you enough money to purchase entirely new kitchen equipment after an approved claim.

Actual cash value

Actual cash value insurance policies reimburse you based on the amount of money the item was worth at the time of loss. That means ACV policies factor in depreciation and do not pay the amount needed to completely replace an item.

Consider the same kitchen fire as before, but now for actual cash value renters insurance. If your claim is approved, you’ll receive a reimbursement check for your damaged equipment with depreciation factored in. So if you purchased your microwave two years ago for $100 and the insurance company determines it has depreciated by 25% in that time, you’ll only receive $75.

How to choose the policy type for you

Replacement cost renters insurance is more expensive than actual cash value policies because RC policies provide more coverage. When you purchase your renters insurance policy, most companies will give you the option to upgrade from ACV to RC. Knowing the key differences between replacement cost and actual cash value coverage can help you make the right choice.

Replacement cost renters insurance

A renters insurance replacement cost policy provides more financial protection than an actual cash value policy. If you want the peace of mind of knowing you’ll have fewer out-of-pocket costs after a disaster, a replacement cost policy may be right for you.

However, remember that a replacement cost policy comes at a premium – it will be more expensive than an actual cash value policy. That means for the increased level of protection, you’ll have to pay more up front.

Actual cash value renters insurance

The advantage of actual cash value renters insurance is that it lowers your monthly premium. Because actual cash value policies supply less coverage, it is the cheaper option. Insurance companies assume less risk with actual cash value policies because they are only responsible for paying out based on the depreciated value of an item.

Although ACV is the cheaper option, you’ll have to deal with more out-of-pocket expenses after an approved claim. If you want the cheapest monthly premiums and are prepared to pay out-of-pocket costs after a loss, we recommend choosing ACV renters insurance.

RC vs. ACV: pros and cons
Policy type Pro Con
Replacement cost No out-of-pocket costs to replace an item after a loss* More expensive premiums
Actual cash value Cheaper monthly premiums Out-of-pocket expenses to replace an item after a loss
*Except your deductible

What about my deductible?

Both actual cash value and replacement cost renters insurance policies have deductibles for your personal property. A deductible is the amount of money you must pay out-of-pocket toward a loss before the insurance company contributes toward the claim amount.

For example, say you have a $1,000 deductible, and file a claim for $5,000. Assuming the claim is approved, you’d have to pay $1,000 toward the claim, and the insurance company would pick up the remaining $4,000. Typical renters insurance deductibles start around $500, and most companies will let you pick your deductible up to around $3,000.

It’s important to consider your deductible together with your ACV or RC coverage type because they are the factors that contribute to your out-of-pocket costs. With RC, your only out-of-pocket cost is your deductible. For an ACV policy, on the other hand, you’ll have your deductible and the depreciated item amount.

RC vs. ACV: out-of-pocket expenses
Policy type Out-of-pocket costs after a loss
Actual cash value Deductible and depreciated value of lost items
Replacement cost Deductible

Because ACV policies calculate your claim amount based on the depreciated value of your belongings, you’ll be responsible for the difference. For example, if you had a couch initially valued at $5,000, but now worth $3,000 due to depreciation, you’ll be out $2,000 to replace it.

Bottom line

Renters insurance is one of the most affordable insurance products out there, and it provides valuable liability and property coverage. Whether you choose an ACV or RC policy, we think renters insurance is worth it. It is impossible to predict when and where disaster will strike, so having protection from the unexpected can give you peace of mind and financial stability.

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