If you need to calculate the amount of protection your homeowner’s insurance will offer you, you can use the Actual Cash Value or ACV. Apart from ACV, you can also calculate it using Extended Replacement Cost and Replacement Cost Value, RCV. Top insurance companies in Canada will offer all of these three options.
When buying a Home Insurance plan, you will always look to pay the lowest possible premiums while getting the maximum coverage. Even though actual cash value policies are popular among policyholders, understanding all options will help you choose the best protection for your coverage at reasonable costs.
Continue reading to learn everything you need to know about actual cash value home insurance from the team of insurance experts at Surex.
Actual cash value home insurance in Canada
The actual cost of a damaged property or its current worth in the market immediately preceding the occurrence of loss is called the Actual Cash Value. Using this, you can get an estimate for the cost of replacement or repair of the damaged house or property.
Insurance companies like Surex use ACV to determine the amount they need to shell out to the policyholder to settle the claims. ACV is calculated taking into consideration your property’s age and condition.
Let’s take an example where you have brought a piece of brand new furniture for $1000, but you can never expect to get the same amount for the furniture after it has been used for 5 to 6 years. The amount you will earn from selling the furniture is the Actual Cash Value.
Likewise, home appraisers obtain the ACV value by subtracting the depreciation cost from the original replacement cost of the home or the property. Therefore it is always recommended that you buy insurance coverage based on the actual cost value. This is because it will be cheaper as the claim payment will be lower than the replacement cost coverage option.
The coverage you will receive from your insurance companies will compensate you for the house’s actual value as it is sold in the real estate market.
How to calculate the cash value home insurance payouts
Instead of determining Actual Cash Value traditionally, most insurance companies use depreciation to calculate it. Depreciation is a unique accounting method that spreads the actual value of an item (car, house or any other property) over its expected lifetime.
Now let us take the previous example of the furniture. If you want to depreciate the value of your furniture, you first have to decide its life expectancy. Let us assume that the expected life span of the furniture is about 10 years. So if the furniture is about 5 to 6 years old, it has lived through 6/10th of its expected life, or it has been 60% depreciated. So, the furniture currently has 40% of its lifespan left. So to simply calculate the Actual Cash Value, you can multiply the original value by the percentage of its remaining life:
Therefore, based on the depreciation calculation while selling the furniture, you can ask for $400. This is a simplified version of the way the popular insurance companies in Canada calculate ACV.
How does home insurance actual cash value work?
ACV is calculated by taking the replacement cost of your insured home and subtracting the depreciation value(due to its age and damage due to wear and tear). Your insurance company will calculate whether your house is a total loss or not by comparing its current value to the estimated cost of repairs. It will be a total loss if the value compared to the pre-damage condition exceeds the property’s actual value. The total loss can vary from one province to another.
What is the estimated value or cost lost over time?
To calculate the depreciation value, your insurance company considers various factors. This will vary depending on your contract. However, the general factors include:
- Pre-loss condition of your property: The condition of your house or property before the damage.
- Add on home renovations.
- Recent sales price or cost of the same type of properties in your city or province.
Problems that can arise with an actual cost value
ACV or actual cost value can get more complex if you have applied for a house loan or have financed the purchase of your property and haven’t paid it out entirely yet. The payout you will receive from your insurance might not be enough to cover the expenses, and you might still owe your bank.
In this situation, you can always opt for gap insurance which will help you cover the gap or the remaining amount between what you will be getting as a payout and what you owe to the creditor for your housing loan.
Replacement cost value
Replacement cost value or RCV will cover the amount required to replace your home entirely if it is damaged or destroyed beyond repair. Your home or the property will be replaced by the same or similar home in the market. The replacement cost of your property is usually calculated in the following ways:
- The total and initial price tag for all the items.
- Cost of building the home from scratch.
Insurance policies might also offer coverage for replacing personal property damaged or destroyed. However, RCV will not be covering the value of the land on which the property is built.
Difference between ACV vs RCV
Whenever you suffer a loss due to an event, your ACV value will be lower than the replacement cost. Simply put, you will receive a lower value than the original market cost of your property.
However, on the other hand, for replacement cost value, you will receive the money required to rebuild your house from the beginning based on the current building materials price and labour cost. You will also be compensated for any loss of personal properties, and your insurance company might replace the covered items with similar items based on the current market values.
Actual cash value home insurance explained — Endnote
The main difference between ACV and RCV is the cost of premiums. If you opt for insurance using the ACV plan, you will save a lot of money. However, if you can afford higher premium costs and want to ensure that in future, due to an unwanted event, you do not need to tap into your savings, then RCV will be the best choice.