When you have renters insurance, you can receive a payout for items you own that are stolen or destroyed so that you may replace those items and be made whole. The payout will be given whether a person or some elemental cause is responsible as long as the peril is covered in your renters insurance policy.
But the payout is determined by how much the lost or damaged item is worth. If you file a claim for a $1,000 TV, you’d hope to get $1,000 in return (minus your deductible), or at least the TV replaced for the same make and model. And if your renters insurance plan is a replacement cost value (RCV) plan, that’s what will happen.
However, if you have an actual cash value (ACV) policy, the renters insurance company will deduct depreciation from the value of the TV when determining how much it owes you. Actual cash value policies are more affordable than replacement cost value policies, but they may not be as cost-effective when it comes time to make a claim.
When it makes sense to get an RCV policy
Replacement cost value insurance makes sure that you get the full amount back for any of your belongings that are destroyed, stolen, or damaged. It may be the most cost-effective option if you aren’t able to replace your more expensive stuff out of pocket; if your claim is approved, the renters insurance company will pay you the amount you paid for the item.
Keep in mind that you’ll still have to a pay a deductible, which in renters insurance is usually around $500 to $1,000. Any amount you claim will be reduced by your deductible, so even if you file a claim for that $1,000 TV, if you have a $500 deductible you’ll only be eligible to receive the remaining $500.
Unlike actual cash value policies, RCV policies don’t take into account depreciation. If your TV was top of the line when you bought it, after all this time it may have depreciated in value. Depending on the provisions in your policy, the renters insurance company must either replace the TV as new or write you a check for the amount it was worth when you bought it.
Think of how much TVs, for example, have gone down in price: the $2,000 TV you lost in the fire might today only be worth $500 new, which may not even clear your deductible (meaning you won’t get anything from the renters insurance company on that claim since you still owe the deductible). With an RCV policy, the TV is worth $2,000 for the purposes of filing the claim, but with an ACV policy it’s only worth the depreciated cost of $500.
While replacement cost value policies might net you a higher payout than ACV insurance, they also come with higher premium rates. Additionally, ACV and RCV policies generally have the same or very similar limits of liability, meaning that the insurance company is only obligated to pay up to the amount of coverage you purchased, both on certain individual items and for the combined sum of all the items for which you’re filing a claim.
Read our full explainer on replacement cost renters insurance.
When it makes sense to get an ACV policy
The most important reason to get actual cash value renters insurance is that it’s cheaper than replacement cost value renters insurance. Those savings can add up in the long term, especially if you never suffer any loss or damage to your belongings.
You also might consider an ACV policy if you can afford to replace your stuff out of pocket. That’s especially true if you live in an area with low crime and little to be concerned about from weather conditions. Insurance buys you peace of mind, but if you never have to use it then your actual cash value policy could be more worthwhile.
But renters insurance is inexpensive regardless of whether you have an ACV or RCV policy; the difference may only be an extra $5 to $10 per month. Make a home inventory and see how much you could save if your renters insurance company pays out each item’s replacement cost value and weigh those savings against an actual cash value policy’s premium rates. You may decide that the RCV policy is right for you.
Read our full explainer on actual cash value renters insurance.