Actual Cash Value vs. Replacement Cost

If you are looking to insure your new home or are simply reviewing your existing policy, you may be wondering what your options are when covering your dwelling and personal property.

In the event that you must file a claim due to any damages or losses, it’s important to know what type of coverage you have and how your insurance provider will cover the cost of repairs or replacements.

At Berry insurance, we know how easy it can be to get lost in the intricacies of insurance terms and coverages. In this article we’ll clear up the differences between actual cash value and replacement cost, so you can best plan ahead for any potential claims in your home's future. 

What is actual cash value?

Depending on the type of claim filed, your insurer would determine whether the cost of necessary repairs or replacements to the damages/loss would be covered by actual cash value or replacement cost. 

Actual cash value (ACV) or market value is the value of your home or belongings if they were sold today. This takes multiple factors into account, such as depreciation, land value, location, and the current state of the real estate market. 

For example, if you bought a fridge for $1,500 five years ago and recently had it damaged in a fire, you would be unlikely to be reimbursed for the full amount you originally paid for it. If the claim is approved, the insurance provider would factor in depreciation through age and general wear and tear, determining the current actual cash value of your belonging. You would only receive a fraction of the original cost of the fridge, minus any deductible on the policy. Your deductible being the amount you pay for when insurance coverage is granted.

Actual cash value tends to be cheaper than replacement cost policies, but would provide you with less money when looking to repair or replace any part of your home when filing a claim. 

What is replacement cost?

Replacement cost value (RCV) is the cost to replace something as new or in equal value, reimbursing you based on how the value was deemed by the insurance provider or what it was given on the insurance policy. 

This type of coverage does not factor in depreciation or wear and tear over time, only paying you back based on the determined value of the dwelling or personal property.

To continue our previous example, if the same fridge is damaged, replacement cost coverage would grant you money for repairs or replacements based on the value you paid for the fridge, or the current rate of fridges of equal value. 

As with ACV, your policy’s coverage limits and deductibles would apply with replacement cost. 

While more expensive, replacement cost policies are great for ensuring you are able to replace damaged property or belongings for their given value, no matter the age or condition. 

Extended & guaranteed replacement cost:

Extended replacement cost is an optional policy add-on that would increase replacement cost coverage in the event that any covered damages result in costs that would exceed your policy limits. This can be useful in cases when costs to repair or rebuild after damages or loss become more expensive than expected. For example, when supply and demand of building materials increases after a natural disaster affects multiple homes. 

Similarly, guaranteed replacement cost grants additional coverage as an add-on to your existing policy, but instead has no cap on the additional funds. 

Extended coverage can usually be added to a policy at either 25, 50, or 100 percent of dwelling coverage, guaranteed replacement instead of having no cap. Your deductible would still apply to both of these additional coverages. 

What is the difference between actual cash value and replacement cost coverage?

Actual cash value would typically be used to cover personal property policies, this covers repairs or replacements to any of your personal items if they are damaged or stolen. Replacement cost coverage can be applied to both dwelling insurance as well as personal property policies. The major difference between them is that ACV factors in depreciation while RCV does not. Even with the higher premium, replacement cost policies may be the best option if you are looking to receive the highest reimbursement possible after a claim.

Planning ahead

Being in a situation where you have to file a home insurance claim after heavy damages or loss can be devastating enough, you shouldn’t also have to be taken off guard by the insurance coverage you receive afterwards. 

Knowing the difference between actual cash value and replacement cost is important for understanding how your own policy will cover you in the event that you have to file a claim on your homeowners insurance policy, and if you should purchase additional coverage.  

Knowing the right and wrong times to file a home insurance claim is an important job of any insured homeowner. Learn more about the situations when you should or should not file a claim on your homeowners insurance policy here: When Should You File a Homeowners Insurance Claim?