When should I choose ACV over RCV insurance for my rental properties?
I often hear people say they pick ACV over RCV insurance when the cost to rebuild would be more than the market value. I don't really understand that. Here is an example. I paid $173k for a duplex, but I have to have it insured for $300k for RCV at a $5k deductible. It's about $30 more a month for RCV insured at $300K than ACV insured at $188K. Why does it matter if it costs more to rebuild than market value if the insurance company is paying for it? Am I missing something here? Please let me know your thoughts. I am in the process of making some insurance changes.
With that small of difference ($30/mo) then I would go with RCV. Many people forget that with a ACV policy the insurance company will depreciate the heck out of the house and you will end up with very little check from the insurance co. For example, recently had claim on house for hail damage to roof. They were to give $10,900 less deductible and less the $6000 for depreciation of the roof. Therefore, if I choose ACV then only would have gotten around $3300. But since I had replacement policy I received $9400. Big difference (~$6000). Now how long would it take at $30/mo to make up the difference...200 months or about 16.5 years! It is all about the math.
@Randy Rodenhouse I'm going with RCV. Thanks for the insight.
Yes I agree with Randy, and also that is how I compare if something is worth adding. Also market value has nothing to do with what it would cost to rebuild any house brand new. The insurance companies job is to give you back what you had, and the carrier is usually fairly accurate on what it costs to rebuild.
Quote from @Matt Wells:
I often hear people say they pick ACV over RCV insurance when the cost to rebuild would be more than the market value. I don't really understand that. Here is an example. I paid $173k for a duplex, but I have to have it insured for $300k for RCV at a $5k deductible. It's about $30 more a month for RCV insured at $300K than ACV insured at $188K. Why does it matter if it costs more to rebuild than market value if the insurance company is paying for it? Am I missing something here? Please let me know your thoughts. I am in the process of making some insurance changes.
As a general rule if you can get RCV and the price is not significantly different, take it. There are situations where you cannot purchase RCV or the price IS significantly different and you have to look at those case by case. Good choice sticking with replacement cost!