When you hear the terms “actual cash value” or “replacement costs” do you cringe? If so, you are in the vast majority. Let’s face it, many homeowners happily bury their heads quite comfortably in the sand when purchasing home insurance. Unlike buying a pair of red stilettos or an expensive sports car, there is nothing sexy about purchasing home insurance. Because a home insurance policy forces us to think about what can go wrong, we tend avoid dealing with it or do so reluctantly. Thinking about a loss, like a roof replacement, before it happens, however, is a lot better than realizing you don’t have the coverage you thought you had when loss happens. I encourage you to take the time to understand the difference between actual cash value and replacement cost and then revisit your policy. You may save yourself a lot of money down the road.
Actual Cash Value (ACV)
ACV coverage on your insurance policy means you pay more than your deductible when you replace a loss, such as a roof. This is because the insurance company takes away depreciation. I know what you are thinking, what is depreciation again? Google’s defines the term as “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.” So the age of your roof plays a huge role in how much money you receive for a claim with a policy that has ACV. The cost of a full roof replacement today, taking into consideration present-day materials and labor costs, is irrelevant. Rememeber this formula:
ACV= RC – Deductible & Depreciation
Why People Choose ACV
With ACV, your monthly premiums are lower. For this reason, many insurance companies who just want to get your business quickly and move on will win over customers with an ACV policy that has a lower monthly payout for the client. Low monthly premiums are great, and we all want them. However, no one wants to pay the full price or even half of what it costs to replace a roof when loss happens. For example, if you need to replace a $15,000 roof that is even a few years old, with ACV coverage, your insurance company may only give you a percentage of the cost of replacement because they consider wear and tear of the roof. Depreciation isn’t calculated until after a claim is filed. So you could receive 30% ($4,500) of the cost of replacement, and be left with financing the other 70% ($10,500).
For some homeowners though, actual cash value may be their only option. If your roof is too old or damaged, replacement cost coverage may not be an option until you repair or replace your roof. Having your roof inspected regularly by a professional, particularly after a storm, will clue you in to minor damages that need to be addressed. Making minor repairs in a timely manner will save you money on more costly repairs down the road.
Replacement Costs (RC)
RC coverage means you pay only your deductible, and then your insurance company pays for the remaining cost. Unlike with ACV, depreciation is not a factor in determining your payout. How do you know if you have RC coverage? Your agent should tell you before you purchase the coverage. If they do not, and your premium is enticingly low, be suspicious. Some companies will save on premiums by writing a RC policy, but sneaking in ACV coverage on the roof only. Look for those letters and ask about changes you see from year to year.
Look at your policy and do not be afraid to ask your agent and your insurance company questions. Just as you wouldn’t buy a wardrobe without knowing the size, you shouldn’t buy insurance without knowing your coverage either. In fact, insurance companies pay people to run call centers for the sole reason of explaining coverage to clients. You are paying for this service so do not be shy about using it. For replacement costs, the formula in determining payout does not include depreciation:
RC = RC – Deductible
Texans Especially, Know What You Are Paying For
Let’s talk about the likelihood of needing a roof replacement for a minute. We live in Texas. If you didn’t have hail damage on your roof from a storm this spring, it’s likely next year you will. The Insurance Information Institute ranked Texas #1 for the most hail events in 2018. These statistics are compounded by the fact that Texas lies right in the middle of tornado alley. Finding out what your home and/or roof may be valued at with a local real estate agent can help in making sure your coverage level is current. Ultimately, low rates are only good if you are fully covered.
Do not Ignore the Fine Print
For almost 300 years, the insurance industry has had a bad reputation for jargon that is overly technical and bewildering. The Texas Department of Insurance is a great resource for homeowners. They offer a broader explanation of ACV, RC and any other insurance term that seems ambiguous or vague. Remember, you are the client. Roof replacements are expensive, and it’s your money on the line. Re-evaluating your coverage AND your coverage options at each renewal date will ensure you are protected, literally and financially. Two main points to consider: #1 that you have adequate coverage for the changing needs of your family, and #2 you are getting the most value for your money.