When Should I Consider Insuring my Church for Actual Cash Value vs Replacement Cost?

“Our church is becoming insurance poor.”

I hear that sentence more than almost any other. A large percentage of the budget is going toward insurance, and it simply is not sustainable for the congregation. As a church advisor, I can tell you this is a very real struggle for a lot of churches, and it is not a sign that anyone has mismanaged anything.

Most of the time these are churches in a rural setting. Shrinking populations and shrinking congregations have hit them hard. The building was constructed at a time when the congregation fit the building, when the needs of ministry filled every room. Today that same congregation is caring for a much larger facility than it uses, or can afford to insure.

If that describes your church, there is a coverage conversation worth having. It starts with understanding the difference between replacement cost and actual cash value, and being honest about which one actually fits your ministry today.

When I help a church navigate this reality, I ask them to answer one question before we talk about a single dollar figure: if you had a total loss, a fire or a tornado, would you build back?

If the answer is yes, the follow up question matters just as much. What type of facility would you actually need?

Would you want:

Or would a one story, simpler church building fit the needs of ministry going forward?

There is no wrong answer here. Some congregations would absolutely rebuild what they have, and for them the conversation ends there. But if the simpler, less expensive building is the honest answer, it could be wise to consider actual cash value.

Replacement cost pays what it costs to rebuild or repair with materials of like kind and quality, with no deduction for depreciation. To keep replacement cost coverage, most carriers require you to insure the building somewhere within 80 percent of its full replacement value.

Actual cash value pays what the damaged property was worth at the time of the loss, after depreciation. Because the payout is lower, most carriers will let you insure the building at roughly 25 to 40 percent of its replacement cost value.

That difference in required insured value is where the premium savings come from.

In most states, the property coverage, meaning what the church building is insured for, makes up 75 to 85 percent of the total premium a church pays. That makes your building value the single biggest lever on your insurance cost.

Here is a working example. Say your church has a replacement cost of $4 million, meaning that is what it would cost to rebuild. To carry replacement cost coverage, the insurance company is going to require you to insure somewhere within 80 percent of that value. We will put the annual insurance cost at $20,000.

Now switch that same church to actual cash value. Most companies would let you insure the building within 25 to 40 percent of the replacement cost value, so in our example the church insures for $1.2 million. When the building value drops and coverage changes to actual cash value, you would expect the insurance cost to drop by at least 50 percent. We will put that at $8,000.

In our example, that is a savings of about $12,000 a year.

Before you assign that money to the heating and air bill, let us walk through a couple of claims scenarios. This is the part most churches skip, and it is the part that matters most.

These are claims that are not a total loss. The most likely ones are wind and hail claims, and in my opinion partial losses are the biggest exposure churches face.

When you change from replacement cost to actual cash value, instead of getting paid the cost to replace your roof minus your deductible, the insurance company is going to pay what the damaged property was worth after depreciation, minus your deductible.

For example, a 15 year old roof with a life expectancy of 30 years could be depreciated by at least 50 percent. If it costs $100,000 to replace that roof, the insurance company could pay around $50,000 under actual cash value.

Your deductible changes too, because wind and hail deductibles are often a percentage of the insured building value:

So on the same roof claim:

It is still painful, but not quite as bad as churches often assume when they hear the word depreciation. There is a lot to consider here, and this is the scenario I want every board to walk through carefully before making a change.

Think fire or tornado, where you are rebuilding the church. This varies by state, but in most cases the church would receive a check for the total amount the building was insured for.

In our example, if the church was at replacement cost of $4 million, they would collect $4 million for the building. Personal property and contents are settled differently. If the church opted for actual cash value and was insured at $1.2 million, they would collect $1.2 million.

If $1.2 million works for them to build what comes next, they are in great shape. It would also be important to consider removal costs, permitting, and planning, because those expenses are real and they come out of the same check.

Before you consider switching to actual cash value, make sure you are already in a market competitive insurance program.

That can only be done by working with a church advisor who represents multiple carriers and is not tied to one option. Sometimes the premium problem is not the coverage at all. It is the carrier. Lowering your coverage before you have checked the market can mean giving up protection you never needed to give up.

Actual cash value is not a shortcut and it is not a lesser form of stewardship. For the right church, in the right situation, it is an honest recognition that the building you have is not the building you would build again.

But it is a decision that should be made with the full picture in front of you: what a partial loss would actually pay, what a total loss would actually pay, and whether your current program is competitive in the first place. Those are the conversations worth having before the renewal, not after a storm.

If your church is feeling the weight of an insurance budget that no longer fits, we would be glad to walk through it with you. We represent multiple carriers, which means we can show you what the market actually looks like before you make any changes to your coverage.

Whether you are facing rising premiums, a building that no longer matches your congregation, confusion about your current policy, or a claim that did not go the way you expected, start a conversation with us. No pressure, and no obligation.