Your homeowners insurance policy is meant to protect your home, personal belongings, and family in case of emergency. That’s why it’s so important to purchase a policy that fits your insurance needs and your finances.
When shopping for home insurance coverage, it’s best to have an idea of how much it will cost to rebuild your home and replace all of your belongings in case of a total loss. This number will help you choose your coverage options, deductible, and whether you need actual cash value (ACV) coverage or replacement cost value (RCV) coverage.
If choosing between actual cash value coverage and replacement cost coverage sounds like a bunch of mumbo jumbo, don’t worry. That’s why Insurify is here. We understand the ins and outs of the insurance industry so you don’t need to.
Keep reading for a full guide on the difference between actual cash value and replacement cost policies. Then, use Insurify’s comparison tools to find the best (and cheapest) property insurance policy for you, no matter your ACV or RCV needs.
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Replacement Cost vs. Actual Cash Value
If you’ve never had to file an insurance claim, you may not realize that your insurance payout—the amount of money your insurance company pays to fix damaged property—depends on the type of coverage you have.
Actual cash value policies reimburse policyholders for the depreciated value of their belongings. Just about any personal belonging you can think of has an expected lifespan: for laptops, this number ranges from three to five years; for refrigerators, nearly 10 to 20 years; and living room furniture like couches lasts about seven to 15 years. This depreciation happens naturally, as even your most prized possessions can only take so much wear and tear.
ACV policies simply account for this depreciation. Let’s say you have an actual cash value policy, and a natural disaster ruins your refrigerator. Your insurer will reimburse you for the refrigerator’s value at the time of loss rather than the price you paid or the actual cost to replace your fridge with a new one. This means you’ll likely receive higher payouts for your newer items, and you might not receive a payout at all for items that have outlived their expected lifespan.
Replacement cost reimbursements cover the full cost of repairing your damaged belongings or replacing them with new items at today’s cost. Since replacement cost insurance is based on today’s prices, the cost of rebuilding your home today may be different from the price you paid for your home. That’s why your dwelling coverage should be based on the cost of rebuilding your home (based on its square footage and local construction costs) rather than your home’s fair market value. In the event that you suffer a total home loss and the cost of rebuilding exceeds your policy limit, your insurer will still reimburse your RCV as long as you’re covered for at least 80 percent of the home’s total replacement (or rebuild) cost.
To be completely protected, you’ll need to make sure you choose replacement cost for both your dwelling coverage and personal property coverage. Still, every policy has its exclusions, and even replacement cost coverage doesn’t ensure that all of your belongings will be completely reimbursed in every scenario. Many insurance companies exclude furs, expensive jewelry, and electronics from RCV coverage, and RCV policies often have stipulations for roof damage, even when caused by a covered loss. Talk to your insurance agent to better understand what is and isn’t covered in the company’s replacement cost policies.
Actual Cash Value vs. Replacement Cost Payouts
If you’re still trying to decide whether ACV or RCV coverage is best for you, estimating your actual cash value or replacement cost reimbursement might help. Every policy is different, but let’s walk through an example of a covered loss and calculate the potential payouts.
A windstorm wreaks havoc in your neighborhood and causes a tree in your backyard to fall over and crush your charcoal grill. Luckily, no other property is damaged, but that grill you paid $1,000 for just two years ago is completely ruined. Charcoal grills are expected to last five to 10 years, so we’ll calculate based on the lowest end of the lifespan, although your insurer may determine lifespans differently for certain belongings. Your deductible is $500.
Actual Cash Value Payout:
- Grill buying price: $1,000
- Grill depreciation value per year: $1,000 ÷ 5 years = $200
- Total depreciation since purchase: $200 x 2 years = $400
- Insurance reimbursement (before deductible): $1,000 – $400 = $600
- Final insurance payout (after deductible): $600 – $500 = $100
Replacement Cost Payout:
- Grill buying price: $1,000
- Insurance reimbursement (before deductible): $1,000
- Final insurance payout (after deductible): $1,000 – $500 = $500
As you can see, replacement cost policies can’t save you from your deductible, but they can protect you from depreciation (in this case, $400 worth).
Keep in mind that replacement cost coverage typically doesn’t apply to more expensive property unless you have extended replacement cost coverage or a scheduled personal property endorsement. Even with a replacement cost policy, any items that aren’t covered by RCV will be reimbursed for their actual cash value.
Picking What’s Best for You
If you have home insurance but aren’t sure what type of coverage it is, your policy’s declarations page will list whether it reimburses for actual cash value or replacement cost.
If you’re searching for homeowners coverage for the first time or your insurance needs have recently changed, there are a few things to keep in mind when deciding between actual cash value and replacement cost coverage.
First, where do you live? If your home is in a high-risk area for natural disasters like flooding, earthquakes, wildfires, or tornadoes, you may benefit from replacement cost coverage simply due to the general risk of life in your neck of the woods.
Next, do you need replacement cost for your dwelling coverage, personal property coverage, or both? Protecting the physical structure of your home with replacement cost coverage might leave you better financially equipped to replace your personal belongings on your own, allowing you to go with ACV coverage for your belongings.
Potentially the most important difference when choosing between RCV and ACV policies is the cost of coverage. Replacement cost policies offer higher protection and higher reimbursements, but they also come at a higher cost. If you’re unsure whether you’ll really benefit from replacement cost coverage and you’re looking for savings wherever you can find them, an actual cash value policy might be a better fit.
Still not sure which policy is best for you? Check out Insurify’s responses to policyholders’ questions.
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ACV vs. Replacement Cost - Frequently Asked Questions
Do replacement cost policies always pay to replace lost belongings with new ones?
Not necessarily. Many replacement cost policies exclude certain items from RCV coverage, like furs or fine china. RCV policies also give policyholders a bit of leeway when it comes to replacing their items. Insurers typically reimburse the lost item’s actual cash value first, and after the policyholder replaces the item, they reimburse the remaining difference between the ACV and the new item’s cost.
Why are actual cash value policies cheaper than replacement cost policies?
With just about any insurance coverage, more protection comes at a higher cost. Since RCV policies often lead to higher payouts, policyholders have to pay more upfront. With ACV policies, policyholders pay less upfront but receive smaller payouts.
How can I calculate my home’s rebuild cost?
Your home’s rebuild cost is based on factors like the home’s square footage, the number of bathrooms, and the cost of rebuilding per square foot in your area. Your insurer can help you calculate your home’s rebuild cost, or you can check out Insurify’s guide to replacement cost estimating to give it a shot on your own. Your home’s rebuild cost is based on factors like the home’s square footage, the number of bathrooms, and the cost of rebuilding per square foot in your area. Your insurer can help you calculate your home’s rebuild cost, or you can check out Insurify’s guide to replacement cost estimating to give it a shot on your own.
Are deductibles different from actual cash value vs. replacement cost policies?
No, your deductible is a set amount that you are required to pay before your homeowners coverage kicks in. Whether you have an actual cash value policy or a replacement cost policy, your deductible will be the same (typically $500 to $1,000), and your insurer will simply subtract your deductible from your insurance payout.
Actual Cash Value vs. Replacement Cost: The Bottom Line
It’s important to protect your home, but it’s also important to find homeowners insurance coverage that doesn’t drain your bank account. Weighing the differences between actual cash value and replacement cost coverage before purchasing your policy will ensure you have the perfect coverage amount at the perfect price.
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