Renters Insurance Explained: Actual Cash Value vs. Replacement Cost

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Those who are looking for renters insurance for the first time may not be familiar with all of the terms for this kind of policy. In addition to the features that you want for your renters insurance (theft, fire and flood, water damage, dog bite coverage, etc.) there are also some other terms you may need to know in order to negotiate your policy.

The Point of Renters Insurance

Homeowners are required to get insurance for their home in order to cover the value of their mortgage, but why do renters take insurance for their homes? Tenants in buildings get renters insurance simply in order to protect their possessions. A landlord or other party would generally have some insurance in place for the building itself, but none for all of the things that renters packed into an apartment or house. With that in mind, there are a few different ways to cover your personal possessions, especially high dollar items.

What Is Actual Cash Value?

Actual Cash Value or ACV is one way to value items like televisions, furniture pieces, and other possessions as well as vehicles and larger assets. The actual cash value of an item is simply what it would be worth on today’s market. Using the example of a 10 year old television, it’s clear that actual cash value can be pretty low for items that are more than a few years old.

Replacement Cost

A different way to value items is to apply a straight percentage of depreciation to them over time. This method is called replacement cost, and it can be an advantage to those who want to value items that hold their investment pretty well. For example, using the same 10 year old television, a straight percentage of the depreciation on its original sale price will generally be higher than what is worth in today’s market, because used items depreciate so much for a variety of reasons. Those looking critically at ACV and replacement cost will find their own preferred option.

Using Actual Cash Value and Replacement Cost

Generally, insurance companies will want to use one or the other of these valuations. They’ll propose a comprehensive policy to the tenant. However, sometimes in negotiating the policy, it’s helpful to talk about these two possibilities for items that hold their value, and that the tenant wants to get higher payouts for in the case of a claim. For example, ask the insurer specifically about how they value things like garments, especially if you or someone in the household is a big clothes shopper, to see realistically what the company might pay out in a case of fire or other loss of these possessions.

Other Considerations

Those looking into renters insurance options may also want to think about using deductibles to offset some of the cost. They should pay special attention to features that they can add to their renters policy as “riders” or “endorsements”. These extras can provide better peace of mind for a range of situations that may not be covered in a basic renters insurance contract.

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