Table of Contents
- What is actual cash value in renters insurance?
- How does actual cash value coverage work?
- Pros and cons of actual cash value policies
- How to calculate the actual cash value of your personal property
- How to file an actual cash value claim
- Getting an actual cash value policy with a replacement cost rider
- Should I choose an actual cash value renters insurance policy?
What is actual cash value in renters insurance?
An item’s actual cash value is its value in its current condition. Because items tend to lose their value over time in a process called depreciation, an item’s actual cash value will be less than its sticker price (what you’d pay for it if you bought it new in a store).
Say, for example, that you bought a laptop three years ago for $800. If you tried to sell that laptop on eBay right now, you might get a couple hundred dollars for it, but certainly not the sticker price. The laptop’s actual cash value is the couple hundred you’d be able to sell it for.
How does actual cash value coverage work?
If your renters insurance policy is an actual cash value policy, your provider will (unsurprisingly) pay out each item’s actual cash value when you file a property loss claim. If your $1,000 smartphone gets stolen and you have actual cash value coverage, your insurer will cover its “eBay price,” which might be $600 or even less.
The alternative to an actual cash value policy is a replacement cost policy. This type of renters insurance will pay enough to replace each lost item with a comparable new one, ignoring depreciation. With this policy, if your $1,000 smartphone is stolen, your provider will cover the full $1,000 — what it would cost to repurchase that exact model of smartphone, or an equivalent.
Note that in either case, you’ll have to pay a fixed amount out of your own pocket, called your renters insurance deductible. Let’s say you have an actual cash value policy and a relatively average deductible of $500. If your smartphone’s resale value would have been $600, your insurer will only pay out $100 for it. With a replacement cost policy, they’d have paid out around $500.
Pros and cons of actual cash value policies
Actual cash value policies are cheaper, but provide less coverage than replacement cost value policies.
Pro: less expensive
On average, you’ll pay about 10% less for actual cash value coverage than replacement cost coverage.
Due to the generally low cost of renters insurance, this might not be a big advantage. Renters insurance costs about $15 per month on average, which means that if you opt for an actual cash value policy, you’ll usually only save around $1.50 per month, or $18 per year.
Con: lower payouts
Most items depreciate after you buy them, so an actual cash value policy will almost always pay out less for property loss claims.
This can be a major problem for some items (such as electronics, which depreciate substantially) and a minor problem for others (such as artwork, which tends to hold its value).
Items that hold their value
Since an actual cash value policy will reimburse you based on depreciated worth, it’s helpful to know what sorts of items are less likely to depreciate. Here’s a partial list:
- Collectibles, like rare coins and baseball cards
- Certain luxury brands, like Rolex watches and Louis Vuitton bags
- Rare artwork
- Antiques that were already old when you bought them
Borderline cases include precious metals (which don’t depreciate, but do have volatile prices), and jewelry and fine wines (which drop sharply in value right after you buy them and then hold their remaining value for a long time after that).
How to calculate the actual cash value of your personal property
Most insurers calculate actual cash value by figuring out how far along the item was in its expected lifespan.
To calculate actual cash value, use this formula:
actual cash value = (replacement cost) x (% of lifespan remaining)
Let’s say that 4 years ago, you bought a high-end gas grill for $2,500. Your insurer estimates that grills of that quality have an average lifespan of 10 years, which means you’re 40% through its lifespan, with 6 years (60%) remaining. Multiply 2,500 by .60 to get the item’s actual cash value: $1,500.
Using the actual cash value formula
With the formula, estimating the actual cash value of your property is straightforward. The trickiest part is finding each item’s expected lifespan.
Here’s a list of common items with their approximate lifespans:
- Personal computer: 4 years
- Suit: 5 years
- Bicycle: 10 years
- Microwave oven: 10 years
- Mattress: 11 years
- Refrigerator: 15 years
- Wooden furniture: 20+ years
- Watch: 20+ years
You can predict the lifespan of items that aren’t listed but are similar to those that are. For example, a sofa has the same expected lifespan as a mattress. Keep in mind, though, that even two sofas can have greatly varying lifespans — the listed values are only guidelines.
Negotiating the actual cash value of your property when filing a claim
In theory, the rate at which your property depreciates depends on how heavily you use it. If you’ve had a leather jacket for 5 years, but it’s spent most of that time in a climate-controlled closet, it’ll be in better condition than one you’ve been wearing every Friday to a fight club in the local bar’s basement.
In practice, your insurer won’t ask what kind of condition your item was in. They’ll just use the formula written above. However, if you took very good care of an item, you can make the case that you’re entitled to more money.
Make sure to provide documentation (this means pictures). Be calm but persistent, use online valuation sites, and get a lawyer’s help if necessary.
How to file an actual cash value claim
If your property is damaged or stolen, you should contact the police if criminal activity was involved. If your apartment was damaged or broken into, you also should tell your landlord right away.
Then you should file a renters insurance claim as soon as possible. Insurance companies generally give you two to three days to do so.
There are three steps to filing a claim:
- Document evidence
- Notify your insurance company
- Wait for your insurance company to review your claim
- Receive a payout
Step 1: Document evidence
The most important thing to do before filing a renters insurance claim to document the type and extent of damage to your property. Assemble as many of the following as you can:
- Pictures of the item before and after the accident
- Pictures of the accident itself
- The item’s model number
- Police report / evidence
Sometimes not all of these will be applicable. Some items don’t have model numbers, for example, and different insurers require different information.
Your insurance company will list the information they want on its website. In general, you should provide as much as you can.
Step 2: Notify your insurance company
Once you have the required documentation, you can file a claim online or by mail. Filing online is quicker and easier: just navigate to your insurance company’s website and look for a “Claims” tab on the front page, or something similar. This page will have a form to fill out (or a phone number to call).
If you want to file a claim by mail, call the company and request a physical form. The process is essentially the same, but will take a few days longer.
Step 3: Wait for your insurance company to review your claim
Renters insurance claims are usually fairly simple, so your insurer will probably resolve your claim within a few days of receiving it. Some tech-focused companies like Lemonade can resolve simple claims in seconds using AI.
However, if the evidence you provide is unclear or the property in question is unusually valuable, you may have to wait for a claims adjuster to contact you. It’s possible they’ll want to visit you in person to check out your claim.
Most major insurance companies allow you to track the progress of your claim online in real time, including:
- State Farm
Step 4: Receive a payout
Once your claim is approved, your insurance company will send you a check or wire you money to cover the actual cash value of your item.
Getting an actual cash value policy with a replacement cost rider
An endorsement or rider is an add-on to your renters insurance policy. Instead of purchasing a replacement cost value policy, you could add a replacement cost rider to your actual cash value policy, which would add replacement cost coverage for a particular item or class of items rather than everything you own.
For example, let’s say you have an expensive heirloom watch. If it’s the only item you want to fully insure, it’s more cost-effective to buy a replacement cost floater to cover it, while maintaining a cheaper actual cash value policy for your other, less important possessions.
People often buy replacement cost riders to cover their:
- Personal collections (e.g. cards, coins, stamps)
- Specialty equipment
- Business property
Exceptions and exclusions to replacement cost riders
Riders work like miniature insurance policies, so they have the same exceptions for excluded perils that standard renters insurance policies do.
Should I choose an actual cash value renters insurance policy?
In general, no, you shouldn’t pick an actual cash value policy if you’re given the choice.
Like we said, renters insurance is so cheap that you’re unlikely to save a lot of money by choosing actual cash value.
However, there are a few situations where you might choose an actual cash value policy:
- You don’t own many valuable items: If your personal property is secondhand and not particularly expensive, the difference between the two types of policy might be fairly small.
- Your property is unlikely to depreciate: Similar to the first case, this is a situation where the added coverage of replacement cost doesn’t help a great deal. However, most property does depreciate, so this situation isn’t very likely.
- You’re not interested in personal property coverage: If you mainly bought renters insurance for the liability coverage (or because your landlord forced you to) and you’re not that worried about insuring your personal property at all, you may want to reduce your premiums by choosing a cheaper policy.