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Actual Cash Value vs. Replacement Cost for Renters Insurance

What are actual cash value and replacement cost renters insurance policies? How they differ from each other? And which one should you choose? You'll find answers to those and other questions here.

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If you've ever rented an apartment, condominium, or house, you've surely heard or read that you should buy renters insurance.

There's a reason it's recommended so frequently and so heartily, of course. Without it, you're basically on your own if a fire or natural disaster damages or destroys your belongings. The same is true if someone breaks into your rental and steals, destroys, or damages your stuff.

"On your own" in this instance means "you'll have to replace your possessions using your own money," by the way.

That may not be a big deal if you live minimally and you have very few possessions. But if you're like most people and you could fill a couple of multi-room apartments--or more--with your belongings, it'd probably be a huge deal.

The thing is, buying a renters policy isn't quite as simple as opening an app or visiting a website and clicking on a button that says "I need renters insurance."

Don't worry, it's easier--and usually cheaper--than buying most other kinds of insurance. But it still requires more than a single step.

One of the more important steps of this process: deciding if you want a renters insurance policy to pay you the actual cash value or the replacement cost value of your items should something happen to them.

Keep reading if those words mean little or nothing to you. Not only do they impact how much an insurance company reimburses you for your stuff if it's damaged, destroyed, or stolen, but they also affect how much you spend per month to maintain a renters policy.

Are you new to the whole renters insurance thing? Do you want to learn more about it and what it typically covers? Read our "renters insurance basics" article.

All About Actual Cash Value

Here's probably the easiest way to remember what actual cash value, or ACV, means when it comes to renters insurance: it means your insurer will pay you what your belongings are actually worth today in the event of a fire, other catastrophe, or theft.

In other words, if you buy a renters policy that calculates payouts using ACV, you'll have to come to terms with not "getting what you paid" for most of your items if something happens to them.

That's because this type of renters insurance considers "wear and tear"--or depreciation--when determining how much to reimburse a policyholder for in the wake of a claim.

To put it another way, the older an item, the less you'll get for it if it's damaged, destroyed, or stolen as a result of a "covered peril."

So, that laptop you bought four years ago for $2,000--don't expect to receive a check for that amount should someone break into your apartment and take it. The same would be true of your $1,000 TV and $500 game system if they went missing.

How much could you expect to receive from your insurer? Unfortunately, it's hard to say. Every insurance company uses its own formula or formulas in this kind of situation.

One example: some insurance companies calculate an item’s value as a portion or percentage of its life expectancy. If your laptop is expected to last for six years and a fire destroys it after just three, its ACV would be half of its original asking price of $2,000.

Other insurers simply look at market data to come up with an item's actual cash or depreciated value.

The only way to know for sure how your insurer will respond to an actual cash value claim is to pick up the phone or send an email and ask what it'll pay if your possessions are damaged, destroyed, or stolen.

Replacement Cost Value Explained

Actual cash value isn't your only option when you go to buy renters insurance. Your other option is to get coverage that'll pay you the replacement cost value, or RCV, of your belongings if they're stolen, damaged, or destroyed.

Should you get a renters policy that calculates payouts using RCV, your insurance company will send you a check for an amount that allows you to replace your possessions with ones that are of the same (or similar) type and quality.

So, there's no depreciation to worry about here. If a thief steals your $800 phone, or if a fire destroys it, you won't receive just a few hundred dollars--like you would if you bought an actual cash value policy. With a replacement cost policy, you'd receive enough from your insurer to buy a brand new one.

Note: some people call this type of coverage "policy premium" renters insurance. That makes sense for a couple of reasons. The main one is RCV policies almost always cost more than ACV policies. Of course, the higher premiums tied to replacement cost policies lead to higher payouts if catastrophe strikes, so the extra expense tends to be worth it in the end.

Which is Better: Actual Cash Value or Replacement Cost Renters Insurance?

To get the biggest bang for your buck, you need to consider a number of factors when shopping for renters insurance.

One of the most important factors to consider here: your belongings. Or, more accurately, how much your belongings are worth.

After all, if you don't have much stuff, or the stuff you have isn't worth much, there's probably very little reason for you to spend extra for replacement cost renters insurance. But if you have a lot of stuff, or if you have stuff that's worth a good amount of money, the added expense of an RCV policy may sound quite a bit more appealing. (Because that type of renters policy will pay you the current market value for your possessions if they're damaged, destroyed, or stolen.)

What's the best way to figure out how much all of your stuff is worth? Make a home inventory. Learn how in our article, "Create an Inventory of Your Possessions for Renters Insurance Claims."

After you have a pretty good idea as to what your belongings are worth, turn your attention to the overall costs of the renters insurance policies you're most seriously thinking of buying.

In general, you'll pay less per month for an actual cash value policy than you will for a comparable replacement cost policy. That's not the whole story, however. You also have to consider each plan's deductible. (This is the amount of money you'll pay before the insurance company jumps in and covers the rest of a claim.)

You have to consider the dollar limits named in a particular policy, too. Most renters policies put a cap on how much they'll pay out for certain categories of items in the event of a covered peril. To be more specific, they'll usually only pay up to a certain amount or limit for fine art, antiques, jewelry, or even musical instruments. 

If you own a lot of these kinds of items, you'll want to make sure any renters insurance policy you buy adequately covers them. (You may have to pay extra for a rider, floater, or endorsement. To learn more about these add-ons, read our article about how you can protect your valuables with insurance riders.)

Something else to keep in mind while you consider your ACV and RCV options: should you ever file a claim on it, you'll likely receive your payout more quickly if you buy an actual cash value policy than you will if you buy a replacement cost policy.

That's because most insurers require policyholders to replace their damaged, destroyed, or stolen possessions before fully reimbursing them. First, you'll get a check for the actual cash value of your items. Then, after you replace them, you'll get additional checks for the remaining amount. (Whether you receive two or more checks depends on how quickly you replace your belongings. If you replace all of them within a short period of time, you may receive just one additional check. If you replace them gradually, you may receive a number of additional checks.)

A few more comments about the overall cost of ACV and RCV renters policies:

  • Although actual cash value policies usually are cheaper than replacement cost policies, they're not a whole lot cheaper. In fact, the Insurance Information Institute estimates ACV policies are only about 10 percent cheaper than RCV ones.
  • Also, all renters insurance policies are pretty cheap. Even those that pay you the full replacement cost, rather than the current market value, for your stolen, destroyed, or damaged items. According to the National Association of Insurance Commissioners, the average renters policy costs between $15 and $30 a month. Sure, some insurers will sell you an ACV policy for only $5 per month, but most charge an amount that's somewhere in the middle.

Which means, of course, that once again shopping around is the key to saving money on insurance--even when you're talking about "low cost" renters insurance.

Frequently Asked Questions

Q: What is actual cash value when it comes to renters insurance? Or what does actual cash value mean?

A: When insurance companies use the words "actual cash value" in regards to a renters policy, they mean they'll pay you what your belongings are actually worth today if they're damaged, destroyed, or stolen.

Basically, they'll consider how long you've owned your items and then reimburse you for a percentage of what you originally paid for them.

Unfortunately, yes, this means that if you buy ACV renters insurance and most of your stuff is old, you won't receive much from your insurer if a fire destroys your apartment and all its contents or if a natural disaster or thief does the same.

Q: What is replacement cost? Or what does replacement cost mean in the context of renters insurance?

A: When it comes to renters insurance, replacement cost means the insurer will pay a policyholder enough to replace damaged, destroyed, or stolen possessions with new ones of a comparable style and quality.

That's a big deal, especially since actual cash value policies only pay what your possessions would be worth if you tried to buy or sell them today. Most items quickly depreciate in value after they're bought, which is why you might receive just a few hundred dollars for your three-year-old laptop even though you originally paid $2,000 for it.

Q: How does an insurance company determine what an item is worth today?

A: Most insurance companies use one of two methods to determine a stolen, destroyed, or damaged item's worth.

One method is to calculate its value as a portion or percentage of its life expectancy. Take the $2,000 laptop that's been mentioned a few times in this article and that was bought three years ago. If the insurer expects it to last for six years, it would be worth just $1,000 now.

Another method is to calculate an item's value by looking at current market data.

Which method does your insurance company use? It's hard to say. To find out one way or the other, you have to contact them directly.

Q: Why should I choose an actual cash value renters insurance policy over a replacement cost policy?

A: If money is tight, or if you're trying to save money for some other reason, you might buy an actual cash value policy simply because it's cheaper than a replacement cost policy.

Or you might buy an actual cash value policy rather than a replacement cost one if you don't have many belongings, or if you have very few belongings.

Q: Why should I choose a replacement cost renters insurance policy over an actual cash value policy?

A: If you have a lot of possessions, or you have a number of especially valuable possessions, you might want to spend the extra few dollars a month that are needed to buy a replacement cost policy.

These policies also are a good idea if you have possessions that would be hard to replace.

Although they usually cost more than actual cash value policies, they don't cost much more. As such, the added expense may be worth it if it keeps you from worrying about what you'd do if all your things were damaged, destroyed, or stolen.

Q: Can you insure some of your belongings for actual cash value and some for replacement cost? Or do you have to choose one or the other when you go to buy renters insurance?

A: If you have a lot of things but only some of them are valuable, you might want to buy a renters policy that covers the actual cash value of most of them and then pay extra for a rider or floater that provides additional coverage for the ones that are worth more money.

Q: How much does an actual cash value renters insurance policy cost?

A: Actual cash value policies can cost as little as $5 per month. That said, they can cost quite a bit more than that, too.

How much you pay for an ACV policy depends on what you want it to cover. It also depends on the insurance company selling the policy.

For the best deal, shop around. Contact a number of insurance companies and compare quotes.

And don't forget to look beyond the monthly premium. You also need to consider a plan's deductible, dollar limits, and exclusions.

Q: How much will I pay for a replacement cost value renters insurance policy?

A: Most of these renters insurance policies cost less than $20 a month. That means some are more expensive than that, and others are less expensive.

Again, what you pay per month of a RCV policy depends on what you want it to cover and where you buy it. So do your homework and don't just go with the first one you come across.

Q: What information do I have to give my insurance company in order for it to reimburse me the replacement cost of my items?

A: Every insurance company is different. What one insurer requires in this situation can be quite different from what another insurer requires.

That said, here are the things an insurance company is most likely to ask for if you file a claim on a renters policy:

  • descriptions of the damaged, destroyed, or stolen items
  • when you bought them
  • how much you paid for them
  • proof of purchase, such as receipts, manuals, or even photos
  • photos or video footage showing the condition of each item

Q: Can I negotiate the actual cash value or replacement cost of my items with the insurance company?

A: You might be able to negotiate with your insurance company about the replacement cost of your items. For example, if someone steals a TV you bought five years ago, you probably won't be able to replace it with a TV of the same make and model today. In cases like this, your insurer may reimburse you for a newer equivalent.

Q: What if I file a replacement cost claim on an item that can't be replaced, like an antique or a piece of fine art?

A: If you own any items like this, tell insurers about them when you go to buy a policy. They will advise you as to how you can properly protect irreplaceable or hard-to-replace possessions.

That may require you to pay extra for a rider, floater, or endorsement, by the way. Still, the added cost is sure to be worth it if the alternative is for you to receive a small fraction of what your items are worth in the event of a disaster or theft.

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