Knowing the Difference Between Actual Cash Value and Replacement Cost Is Crucial
When it comes to homeowners insurance policies for your roof, there are two major categories of coverage: actual cash value vs replacement cost roof insurance. While both of these types of policies will provide some level of coverage for a necessary roof replacement, they differ greatly in how your insurance payment—and premiums—are ultimately calculated.
At Dolan Roofing & Construction, we spend a lot of time working with homeowners who are navigating the storm damage repair and replacement process, including the insurance claims process.* Sometimes, homeowners are surprised to find that they still owe money out of pocket even for a roof replacement due to hail or other covered types of damage. In today’s post, we’re comparing actual cash value vs. replacement cost insurance coverage for your roof, and the impact these different policies have.
Actual Cash Value vs Replacement Cost Roof Coverage
Both actual cash value and replacement cost insurance policies typically provide coverage and funding for a roof replacement when your roof is severely damaged. However, the major difference between these two types of policies lies in how the insurance payout is calculated. Let’s take a look at each one individually.
Replacement Cost Roof Coverage
When it comes to funding a roof replacement, replacement cost policies are generally more straightforward. Under these types of policies, your insurance company agrees to pay the full cost of your roof replacement (assuming the replacement is due to covered events, rather than something like neglect).
Actual Cash Value Coverage
On the other hand, actual cash value (or ACV) insurance agrees to pay the homeowner for the actual value of the roof at the time of replacing. As your roof ages, it depreciates in value and becomes more likely to become damaged or need replacing. To account for this, your insurance provider will reduce the roof replacement coverage they provide each year.
As an example, say your roof cost $25,000 when it was first installed. For each year past that installation date, its actual cash value will be depreciated by a certain amount, often $1,000. If a roof replacement becomes necessary after 15 years (and $15,000 of depreciation), an ACV roof insurance policy would pay $10,000 of the cost to replace your roof, often minus a deductible that you agree to pay as well.
The Tradeoff: Pay More Now, or Pay More Later
From this description of actual cash value vs. replacement cost roof insurance, it may seem like the latter is always better. However, it’s not as cut and dried as you may think.
Replacement cost policies command higher premium costs compared to actual cash value. In other words, you’ll pay more per month for your insurance policy in order to pay significantly less when the time comes to replace your roof.
While replacement cost policies usually make more sense in the long run, every homeowner’s financial situation is different. If you find yourself able to choose between the two, you’ll need to determine whether the more complete coverage later on is worth the higher monthly cost.
Not Sure What Coverage You Have? Reach Out to Your Provider!
At Dolan Roofing, we always recommend that San Antonio homeowners refresh themselves on their insurance policy information every so often. This way, you’ll never be surprised by an insurance payment that is much lower than you expected. If you’re unsure how your homeowners insurance policy calculates payouts for roofing work, get in touch with your provider right away and ask all the questions you need.
And if your roof hasn’t been inspected yet this year, it’s time to get in touch with Dolan Roofing! Knowing the state of your roof can help prepare you for a roof replacement—whether it’s likely to be needed in the next year or the next decade.
* NOTE: Dolan Roofing and Construction and its authorized representatives are NOT acting as Public Insurance Adjusters and will not negotiate with insurance on Customer’s behalf.
