The fee to replace a damaged or destroyed item is insured without lowering the price because of depreciation.
What Is Replacement Cost Value (RCV)?
The replacement cost value is the value needed to make repairs and replace materials based on today's market prices. The cost of building supplies changes over time. With RCV, the policy pays out enough to cover the replacement of those materials based on today’s value, not the value when you obtained the policy.
The same applies to the RCV of assets. It pays the amount needed now to replace the covered belongings based on what the same or a similar item today would cost.
Formula for Replacement Cost Value
The most direct method for calculating RCV is to estimate the total cost of the build the property based on a per-square footage figure. Base this on the current price per square foot to build a home or other property that’s similar to your own.
For example, if a local contractor charges $200 per square foot to build a home, and the current property is 2000 square feet, you would calculate:
- 200 x 2000 = $400,000.
This would represent just the cost of building the property, not the cost of replacing the belongings within it.
Difference Between RCV and ACV
By comparison, actual cash value (ACV) is the amount the item is worth right now. Over time, the value of belongings will decrease in value due to depreciation.
For example, a policy with ACV coverage will pay the current value of an item. For example, if a covered peril occurred in which the appliances would be covered, in an ACV policy, it would cover the current value of those applies. This is the cost minus the depreciated value of the item over time. By comparison, the RCV would pay the amount needed to replace the appliances at today’s cost.
Is ACV or RCV a Better Option?
Is one better than the other? It depends on what you are covering.
If you hope to recoup the actual full cost of the belongings you own, RCV may be a better choice. It will pay out what is needed today to replace what you have lost. However, this type of insurance policy typically costs more than ACV, though the trade off may be beneficial in some situations. In most situations, having replacement cost coverage is better as it will replace the damaged or lost items, providing enough funds for you to buy or repair what you own.
ACV pays out what the items are worth right now. If you do not need to replace those items, ACV is a lower-costing option in most cases.
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