Home Insurance Replacement Cost vs. Actual Cash Value

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Insurance is a way of protecting your most valuable assets from loss. If one of these assets is damaged, you can call on your insurance policy to help cover the cost of repairs and/or a replacement.

However, your coverage might not reimburse you for the full out-of-pocket cost after you file a claim for a covered loss. Depending on whether your home insurance coverage includes replacement cost value (RCV) or actual cash value (ACV), you may actually be responsible for a portion of those expenses.

Here’s what actual cash value and replacement cost value include, and how to determine which coverage is right for you:

What is replacement cost?

Replacement cost is the full out-of-pocket expense required to replace or repair a covered item. This may include rebuilding your home after a fire, repairing your roof after a hailstorm, or even replacing personal belongings lost to theft.

Replacement cost coverage accounts for how much those items or repairs cost today, not necessarily when they were first purchased. The purpose of this coverage is to make you, the insured, whole again following an eligible loss, even if the cost to replace or repair your covered items is more than when you bought them.

Since replacement cost value doesn’t factor in depreciation, it generally results in a higher payout than actual cash value.

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What is actual cash value?

Actual cash value on a homeowners policy accounts for how much your assets are worth at the time of the loss. The payout — also called a settlement amount — accounts for both depreciation and, in many cases, market adjustments, so it may or may not actually pay for a full repair or replacement of the item. Depreciation reduces the value of property because it takes into account the age and usage of the item.

For example: If you need to replace a roof following a storm, actual cash value would look at when the roof was installed and what sort of condition it was in before the loss occurred (including normal wear and tear). Since depreciation is factored in, if you’ve used that roof for 12 years, your ACV will likely be much lower than if it were a two-year-old roof.

More often than not, the actual cash value is less than what you paid originally, since most items lose value over time. It may also be less than the current cost to replace or repair the asset. How much less depends on what type of asset it is and what the depreciation formula is; some items depreciate much faster than others, so they’ll lose more value in a shorter period of time.

Learn More: What Does Homeowners Insurance Cover?

Replacement cost vs. actual cash value

When it comes to filing an insurance claim, there’s often a big difference between the replacement cost versus the actual cash value of your personal property or assets.

Replacement cost policies are typically the default option, especially when it comes to homeowners insurance coverage. In many cases, you can opt for actual cash value instead, which may lower your home insurance premiums.

Tip: Always read your policy documents carefully to see what coverage you have.

Your insurer will typically require you to replace a damaged or lost item first before giving you the replacement cost value of the item. When you file a claim, the insurer will often provide a settlement check for the item’s actual cash value. Once you replace the covered item, the insurance company will usually cut another check to reimburse you for the depreciation, if applicable. This is also referred to as recoverable depreciation.

Replacement cost vs. actual cash value example

Here’s a quick overview of how replacement cost value and actual cash value compare:

For example, let’s say that you just replaced the roof on your home eight years ago for a total cost of $18,000. The value of the roof depreciates 5% every year. In this scenario, your depreciation from installation to today would be approximately $6,060. This means that if you had an ACV policy and a hailstorm destroyed your roof today, your insurance company would write you a check for somewhere around $11,940.

However, you probably wouldn’t be able to replace your roof for anywhere near that amount. After all, you paid $18,000 to replace it nearly a decade ago, and costs have gone up. You call around to get roofing quotes, only to find out that a comparable roof today will cost you closer to $20,000, requiring you to pay 40% of that new roof’s cost out of your own pocket.

If you had replacement cost value coverage instead, your insurance company would likely write you a check for the actual cash value ($11,940) and then another check for the recoverable depreciation ($8,060) — covering the full replacement cost of $20,000.

Replacement cost vs. actual cash value: Which costs more?

Opting for a policy that offers greater coverage is typically more expensive than buying a policy that won’t pay out quite as much following a covered loss. While many different variables are at play — such as what’s being insured, your chosen deductible, and the age of the property — you can expect to pay around 10% more for replacement cost value coverage compared to a policy with actual cash value coverage.

Remember: Your homeowners insurance premiums are based on a variety of personal factors and property characteristics, all of which come down to risk. The more risk you pose to an insurance carrier, or how much you could potentially wind up costing them, the more you’re likely to pay for that coverage.

Should you insure your home at replacement cost or actual cash value?

Both RCV and ACV policies have their share of advantages and drawbacks, but the final decision comes down to your personal preferences, budget, and available savings. Ideally, you should insure your home for 100% of its replacement cost.

Replacement cost value policies can save you money if you suffer an eligible loss, as they cover the full cost to replace your property, regardless of the item’s age or wear.

On the flip side, actual cash value policies often come at a lower premium, saving you money every year.

It’s important to ask yourself a few questions when deciding which type of policy to buy. These might include:

  • How much can I afford to spend on premiums today? Would an ACV policy better meet my budget?
  • Do I have enough savings on hand to cover the difference in repair or replacement cost if my home is damaged by a covered event (such as a fire or rainstorm)?
  • Will my policy automatically shift my coverage from RCV to ACV soon anyway?

Also See: How Much Homeowners Insurance Do I Need?

Other types of coverage to consider

Beyond your policy’s actual cash value and replacement cost value coverage options, many insurers offer a few other types of homeowners insurance coverage. Some may be worth considering, especially if you have high-value or quickly depreciating items, which would result in a higher out-of-pocket expense following a loss.

Coverage type What it does Advantages Downsides
Market value coverage Offers coverage for your dwelling at its current market value, or what someone else would pay for the property. This coverage is usually more affordable than replacement cost coverage, and can save you money on premiums. If the cost to repair, rebuild, or replace your home is higher than its insured market value, you’ll be responsible for the difference in a total loss situation.
Extended replacement cost coverage Offers you an added cushion, factored as a percentage of the covered value of the home, if your loss exceeds the limits of your policy. If building, labor, or materials costs increase (e.g., following a natural disaster, when everyone in an area is trying to rebuild), this coverage will give you an additional 10% to 50% of your policy’s benefit to help with the difference. Even with this added benefit, you may not get enough to cover the actual replacement cost of your home. It’s also an additional expense that’s added to your premiums each year.
Guaranteed replacement cost coverage Offers you full reimbursement for the replacement value of the home at the time of loss, even if it exceeds the limits of your policy or stated value of your home. Gives you the peace of mind that, no matter how much it costs to replace your home following a total loss, your policy will cover the difference. This coverage costs more than basic replacement cost or actual cash value coverage.

Not all types of coverage are available in all states, or from all insurance providers. However, the difference in the cost of coverage can be negligible in some cases. It might only cost you a few extra dollars a year to buy extended (or even guaranteed) replacement cost coverage, giving you added peace of mind that your home is protected.

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Disclaimer: All insurance-related services are offered through Young Alfred.

About the author
Stephanie Colestock
Stephanie Colestock

Stephanie Colestock is a Washington, D.C.-based writer who has more than 11 years of experience in writing about investing, business, and personal finances. She’s contributed to outlets such as Yahoo! Finance, MSN, Investopedia, Credit Karma, Credible, and more. She holds a bachelor’s degree from Baylor University and is in the process of earning her CFP® certification.

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