How much money should I insure my rental properties for with ACV and $10K deductible?

Question

I want to get the community's thoughts.  How much money should I insure my rental properties for with ACV (actual cash value) and $10K deductible?  Should I insure for the capital I have in the homes or for how much they are currently worth? I have added value to all of my properties, and they have risen in value from appreciation. If the homes get destroyed I will not rebuild. I want my initial investment back and to move on to other opportunities. If there is a fire or whatever else, I will not claim unless the cost to repair is $20,000 or more.

Bill B. · Answer

Make sure you’re not in an Hoa that would require you to rebuild. Make sure you allocate extra funds, maybe $50-$100k for demolition and removal.

Lastly make sure this is worth the effort and the risk. I don’t see how you could be saving enough? What are your two quotes? I’m paying $6-800 for full bore RCV insurance with a $5k deductible on $450-$600k properties. If the payout if going to a hundred, or several hundred thousand less one claim in your lifetime would destroy any savings.

Ps. When I looked at $5k vs $10k deductibles with was minuscule, maybe $50-$100/yr where it would take 50 -100 years to break even. I do feel like I’ve won with the $5k deductible though. 2 claims in 25 years with a dozen properties. Probably saving $200/yr per property is $2,4000/yr, breaking even every 2 years with a $200 deductible.

Barbara Hirsch · Answer

Bill,

Do you mind disclosing what company you are using? I just got a crazy high number for a new

townhouse.

Zachary Ware · Answer

I would recommend getting an insurance policy at Replacement Cost. If you lost the property to an event, the insurance company can just say it is worth less than you paid for it, leading you to lose money. This is a simplified explanation but what I would worry about getting coverage at ACV.

Bill B. · Answer

A dozen in Vegas and one in MN. ACV (as many of my properties are in HOAs where you are basically forced to rebuild or give up the property as you are allowed only a certain layout.  This means the land would actually have zero or even negative value if the property was a total loss. (The cost to build from scratch would be higher than the completed value.). Plus there was almost no difference, $100/yr give or take. As mentioned I went with $5k deductibles because I’m not making a claim under $10,000 and the savings paid for themselves within a couple years.

Matt Wells · Answer

Thanks all for the information. I'm not sure what I want to do. How do you insure your rental properties? ACV or RCV and what deductible? How many doors do you have? (if you are comfortable sharing) @Randy Rodenhouse @Bo Bond @Bill Brandt

I'm just not sure what I should do.

Bo Bond · Answer

Matt,

Based off what you've described above, I guess the question for you is how much do you really want in the event of a total loss.  If you just want your initial investment back, then you need to figure out "roughly" how much the carrier will diminish your payout after a total loss with an ACV policy.  This won't be an exact science because every claim scenario is different, but you should be able to put together a good estimate.

From what I've heard from industry experts over the years (less your deductible), you could expect about a 40/60 split of the total insured amount after a total loss on an ACV policy.  That means you'd be getting 40% and the carrier keeping 60% for depreciation.  So, if you insured your rental for $100,000, you could expect about $36k in total payout ($100k - $10k ded. = $90k and 40% of $90k is $36k).  If $36k is your initial investment, and you're okay with this payout, this may be the figure you need to go with.  You can adjust accordingly if you need more or less in payout.

Again, this is just an average that I've heard to be applicable in many ACV payout situations.  You would certainly need to visit with your own agent/carrier in order to figure out the best course of action for your situation.

Just remember that ACV applies to "partial" claims as well.  So if you have a $40k water damage claim, you should expect about the same.  You'd have a $10k deductible, and then receive about $12k for damages while the carrier keeps $18k for depreciation.  ** There may be other factors to consider in this payout as well depending on your policy language (applicable co-insurance penalties, exclusions, etc.).

Also, don't forget that many carriers have "minimum" limit requirements.  In other words, they won't let you insure your property for less than $70 dollars a sq. ft. no matter what.  Some may have a lower requirement, while others may have a higher requirement.  Either way, $70 per sq. ft. as a minimum seems to be about average for most carriers from what I've experienced over the years.

Lastly, you also need to visit with your agent/carrier about your desire to just walk away after a total loss.  Most policies have language and requirements regarding this type of response after a total loss.  I'm not sure how much of that would apply to your situation since you already have ACV coverage, but it's certainly worth discussing just in case this diminishes your payout even further.

Hope this helps!  Good luck!

Matt Wells · Answer

@Randy Rodenhouse Thanks for the information. I am aware of the difference between ACV and RCV. Do you have any insight on my specific question?

Randy Rodenhouse · Answer

Replacement Cost (RC) and Actual Cash Value (ACV) are coverage options that differ in how a covered loss settlement will be calculated. RC settles claims with the ability to recoup depreciation, whereas ACV does not. Though ACV may be less expensive than RC due to lower insured values, remember, that settlement is subject to non-recoverable DEPRECIATION.

For example, I had a roof replaced that was covered by insurance due to weather.  The roof replacement cost was about $11,000.  My deductible was $1500.  The insurance company also reduce the payout by about $6000 due to depreciation of the roof (old roof).  So if ACV policy the you would end up with only $3500 check from insurance company.  But since this was replacement cost coverage then I was able to recoup the $6000 after I repaired the roof.  Big difference.

How much money should I insure my rental properties for with ACV and $10K deductible?

Most Popular Reply