How Do Actual Cash Value Policies Payout Claims?


A Recent Story

Recently a couple in our community had a massive fire.

The fire started from an electrical short in their wiring and burned through their attic, kitchen, one bedroom and part of their living room.

The damage left them with debts totaling around $120,000.. The payout for their claim totaled approximately $60,000, which means the additional $80,000 to fix their house and replace things they lost in the fire all have to come out-of-pocket.

What’s really heart breaking is three years ago they had a policy that would have covered them for the full $140,000 (minus their deductible of course).

You might be asking yourself, “What’s with this insurance company? How could they get away with this? That’s highway robbery!”

Actually it’s not. This insurance company fulfilled their promise to pay down to the letter.

In fact, the adjuster, out of the goodness of his heart, even paid a little more than was required after getting approval from his superiors.

So what happened?

They Switched to a Cash Value Policy

Unfortunately, three years ago, this couple had switched to a lower premium Actual Cash Value (ACV) policy instead of the more expensive Replacement Cost Value policy (RCV) that they had maintained for nearly 15 years.

They felt the premiums were getting too high and wanted to switch to save money.

The policy limits, the deductible, even the items insured were exactly the same. The only difference was ACV vs. RCV in payout.

Now you might be asking, “Why in the world would they want to switch after all those years?”

Well, they wanted to switch because the premium for the Actual Cash Value policy was about $300 less per year than the RCV policy. They were pleased with their insurance agent.

She sat down with them and went over the options, the benefits as well as the drawbacks of each policy. In the end, they chose to switch to save money. The grand total in premium savings for the couple: $900 ($300 a year for three years).

Additional cost in loss of payout for the couple: $80,000.

This is a big distinction in homeowners’ insurance policies that sometimes isn’t discussed thoroughly enough during the sales pitch, if you know what I mean.

If the person selling you insurance is extremely focused on price, be very careful because they might be selling you an ACV policy vs. a RCV policy, and that is why their premiums are $300-$500 less.

That’s not always the case, so if they don’t bring it up, you should ask the question: “Does this policy pay out ACV or RCV?”

An ACV Illustration

Let me give you two illustrations, so you can see how it would work in a more common claim.

Let’s say you have an ACV policy and your roof (which you had replaced in 2006) was totaled in a storm as well as your 55-inch flat screen TV you bought in 2009.

So your roof is ten years old and your TV is seven years old.

To calculate how much you are owed based on your ACV, they’re going to deprecate the value of both based on age and condition. It doesn’t matter that it is going to cost $20,000 to replace your roof and probably $700-$800 to replace your TV with a current model.

Let me just make up some numbers that would be fairly close — you’d get something like $12,000 for your roof and $200 for the TV, minus your deductible of course.

Then let’s say your deductible is $2500 (1% of 250,000 dwelling amount) your total payout for the damage would be $9,700, and your repair/replacement bill would be roughly $20,800 or so.

That’s $11,100 that you will have to make up out-of-pocket to replace your roof and 55-inch TV.

My question to all my clients is this:

Is it really worth saving $300 a year to have one very common claim we see year after year, which will cost you tens of thousands of dollars?

Don’t get me wrong, I’m all about saving you money.

One of my goals with each of my clients is to get them the very best value for their insurance dollar.

Every year, before I meet with them for a review, I look at their insurance packages to see if there are new products, new discounts, or anything I can do to increase their savings.

If they truly want an ACV policy, I’ll sell them one, but only after going through it in detail with examples like the ones I’ve shared with you today, so they realize what they are giving up to save the money in premium payments.

If you don’t take anything else away from this entry please hear this:

Paying less in premiums doesn’t mean you’re getting a better value.

Not all insurance policies are created equal. In insurance, just like in anything else, you’re going to get what you pay for.

I’m not saying you can’t find a good deal; I’m saying you always need to make sure you know what you’re receiving.

It’s very common for some of the more price-conscious insurance companies to lower coverage options in their quotes and not point it out during the proposal, so make sure you know the difference!

I much prefer my clients are insured with a Replacement Cost Policy.