What’s the difference between Actual Cash Value (ACV) & Replacement Cost?

Key points

  • Actual cash value (ACV) and replacement cost refer to how a homeowners insurance policy reimburses you after a covered loss.
  • With actual cash value coverage, depreciation can reduce your payout because age and condition factor into value.
  • Replacement cost coverage can help you rebuild or replace items at today’s prices.

What is actual cash value (ACV) coverage?

A homeowners insurance policy with actual cash value coverage typically determines value by taking the cost to replace your personal belongings and reducing that amount due to depreciation from factors such as age or wear and tear, says the Insurance Information Institute.

Personal property coverage helps pay to repair or replace your personal belongings if they are stolen or damaged by a covered peril, such as fire. A policy that provides actual cash value coverage typically reimburses you for the depreciated value of an item. For example, if a fire damages your TV, a policy with actual cash value coverage would reimburse you for its depreciated value, which may be less than it will cost to purchase a new one.

So, the amount you’d receive from your insurer after a covered claim may not be equal to the cost of replacing your belongings with new ones or rebuilding your home at today’s prices.

What is replacement cost coverage?

A replacement cost endorsement or policy helps pay to repair or replace damaged property without deducting for depreciation. This type of coverage may be available for both your personal belongings and your home if they are damaged by a covered peril.

Personal property coverage. If you have replacement cost coverage for your personal property, your insurance will typically help cover the cost of buying a new item at today’s price. For example, if your TV is stolen, replacement cost coverage will likely reimburse you enough to purchase a new one of similar model and quality. It is a good idea to keep an inventory of your personal belongings and estimate what it would cost to replace them.

Dwelling coverage. Most homeowners insurance policies come with replacement cost coverage for the structure of your home. Dwelling coverage typically helps pay to repair or rebuild your home using materials of a similar quality.  It generally does not take into account depreciation of your home due to factors such as age. For example, if your kitchen is damaged in a fire, replacement cost coverage may help pay to replace your cabinets using materials of a similar quality, whether they were 18 years old or brand new.

Does my homeowners insurance policy provide actual cash value or replacement coverage?

If you’re not sure whether you have actual cash value (ACV) or replacement coverage (RC), check your current home insurance policy declarations. Contact your insurance company if you have any questions.

Deductibles and limits

Regardless of what type of coverage you have, bear in mind you may also have to pay a deductible before your insurance coverage kicks in after a covered loss. Also, both types of coverage are subject to limits, which is the maximum amount your policy will pay toward a covered loss. Review your policy to be sure you understand which type of coverage your policy provides as well as the amount of your deductible and coverage limits. Your insurance provider can help you make changes to fit your needs.

Have more questions? Your insurance provider can provide more information about replacement cost coverage and actual cash value coverage so you can choose the protections that are right for you.