Actual Cash Value vs Replacement Cost in Home Insurance

Most insurers offer two kinds of reimbursement options to policyholders on their renters or homeowners insurance: actual cash value (ACV) and replacement cost value (RCV).

Actual cash value insurance means that you'll only get enough back to buy a used replacement, or partially cover the cost to repair something you can't buy used, like a roof.

Replacement cost value insurance means that if you make a claim, you'll get back enough money to buy a new replacement of whatever was damaged, destroyed or stolen.

While replacement cost value policies are the most popular, understanding each option will help you choose the right balance of cost and protection for your coverage.

What is actual cash value coverage?

With actual cash value, your home's value is calculated in one of two ways:

Most standard homeowners insurance policies include coverage for the actual cash value of the insured’s personal property, as well as the replacement cost of your home's physical structure.

An insurance policy with coverage based on actual cash value will be the least expensive to purchase since it factors in depreciation, or the loss of value over time. Therefore, the payments you receive for a claim are generally lower.

How is depreciation calculated?

Each home insurance company may calculate depreciation differently. However, one common method takes into account an expected lifetime of an item, then subtracts a percentage of value for each year since its purchase.

With actual cash value, the insurance coverage for most of your personal belongings will decrease over the number of years you own them.

What is replacement cost value coverage?

Sometimes called "RCV", replacement cost value covers the amount of money it would take to repair or rebuild your current home — if damaged or destroyed — with the exact same or similar materials based on today's prices.

Some home insurance policies and endorsements also include coverage for replacing personal property that is damaged or destroyed, however RVC does not cover the value of the land your property is located on.

It's generally recommended that you get a contractor or appraiser to evaluate your house's replacement cost. They'll know how to price the cost of the building's construction materials (like granite, windows, or doors), any unique or valuable upgrades or additions, and determine your house's fundamental value.

Sometimes the replacement cost is paid in two installments. First, the insurer will pay either the actual cash value or half of the replacement cost. Then, once repairs have been made and you can send documentation to the insurer, they will pay the remaining amount.

Guaranteed or extended replacement cost

Policies with guaranteed or extended replacement cost coverage are the most costly but offer the most extensive protection.

This coverage is an expanded version of RCV coverage: it pays the cost to rebuild your home exactly as it was before an incident, even if the cost exceeds the estimated value of your home in the current market. For example, if your roof is damaged by a hurricane and the price of labor and materials goes up after the storm, you'll still be able to get it fixed without paying extra out of pocket.

With extended replacement cost coverage, your policy will usually cover an additional 20% to 25% more than the replacement value of a claim.

With guaranteed replacement coverage, your insurer will pay the full cost of rebuilding your home to what it looked like prior to damage. If it would cost $20,000 to replace your roof under normal circumstances but the price is temporarily driven up to $25,000, it will be covered. Guaranteed replacement protects you against increases in materials or construction costs, which often happens after a disaster strikes many homes in one area. If you live in an area prone to natural disasters, and your budget allows it, guaranteed replacement cost insurance is a good option.

However, extended replacement cost likely doesn't cover increased costs due to long-term inflation. It's a good idea to periodically assess how much it would cost to rebuild your home and adjust your coverage levels accordingly.