Deciphering how your renters insurance policy pays out.
Renters insurance is insurance to cover your personal property, meaning that if a covered peril destroys that property, your renters insurance company will give you money to replace your damaged property — that’s how renters insurance works.
But how much money will your insurer give you? After all, all televisions aren’t created equal — if you have a 4K 52-inch Sony TV, how do you make sure you don’t get reimbursed for the cost of a 24-inch no-name TV? It’s all about your payout provision — whether it’s actual cash value (ACV) or replacement cost value (RCV).
Read on find out:
The actual cash value of an item is the cost to replace the item minus depreciation. To better understand actual cash value (ACV), you should know that there are two ways insurers determine how much to pay to replace stolen or destroyed belongings:
Replacement cost value (RCV) is the cost of a new item. Replacement cost renters insurance, also known as replacement cost coverage, is renters insurance in which the insurer that pays the amount it would cost to purchase the same or similar item(minus your deductible).
Actual cash value (ACV) is the depreciated value of the item. Actual cash value renters insurance is renters insurance in which the insurer pays the amount you originally paid for or the amount it minus its depreciation (minus your deductible).
An actual cash value policy is cheaper than a replacement cost value policy by about 10%, according to the Insurance Information Institute.
Let’s say a small fire destroys your beloved juicer. If you have renters insurance, you’ll be reimbursed for the juicer. How much, though, depends on your renters insurance policy, specifically whether you have an actual cash value renters insurance policy or a replacement cost value renters insurance policy.
If your policy is actual cash value, you’ll get the depreciated cost of the juicer. So, if you bought a $100 juicer five years ago, it won’t be valued at $100. Your insurance company will do its own math, but our guess is that you’d get between $30 and $60 depending on how your insurance company calculates depreciation for juicers.
If your policy is replacement cost value, you’ll get enough to buy a similar new juicer. So you won’t be able to upgrade to a fancy Vitamix, but if the same or a similar model currently retails for $80, you’d get $80.
Deciding how much renters insurance you need, including coverage limits and whether your policy is an actual cash value policy or a replacement cost policy, depends on several factors, so it’s impossible to say whether one type is better. But most people, if they need to file a renters insurance claim, will want to have replacement cost renters insurance, since it pays out more. But that may not make sense for you. To decide what kind of policy is right for you, you need to do the small task of adding up the total cost of all your possessions by creating a home inventory. Then you need to think about how much it would cost you to replace them. If you think you need more protection, and are willing or able to pay for it out of pocket, a replacement cost value policy might be worth it for you. If you’re comfortable with less reimbursement in case something happens, an actual cash value policy might be a better choice.
Either way, the price of renters insurance is incredibly affordable — both types of policies usually come out to less than $20 a month., with actual cash value policies on the lower end of the spectrum.
In order to know whether your policy is actual cash value or replacement cost value, you need to read your policy or ask your insurance agency. Many insurance companies provide replacement cost value as the default on the policies they write, because they know that’s what people want, but others will require that the insured request one type of policy or another. You can probably assume that your policy is replacement cost value, but you need to confirm with your insurance company to be sure.
There is another option, which is to have an actual cash value policy and add a replacement cost rider(also known as an endorsement or floater) to pay replacement costs on just the items that you have named in the rider. So if you’re committed to keeping your renters insurance as cheap as possible and really only care about your laptop, you can ensure that you’d get the replacement cost of your laptop, and then the actual cost of all of your other possessions.
A rider generally costs extra, but not always. Riders can help fill in where an actual cash value policy falls short.
Colin Lalley is the Associate Director of SEO Content at Policygenius in New York City. His writing on insurance and personal finance has appeared on Betterment, Inc, Credit Sesame, and the Council for Disability Awareness. Colin has a degree in English from the University of North Carolina at Chapel Hill.