Actual Cash Value vs. Replacement Cost in Home Insurance

Two terms you might come across when buying home insurance are “actual cash value” (ACV) and “replacement cost.” ACV covers the value of something minus the decrease in value due to age or use, while replacement cost covers the amount you need to fully replace something without accounting for depreciation.^[1]

Understanding the difference between these two coverage options lets you adequately protect your home and property in case of damage or loss.

Learn more about the differences between ACV and replacement cost and why you might consider each coverage type so you can decide which option meets your needs and budget.

What is actual cash value coverage?

Actual cash value is the amount your insurance company will pay to repair or replace your damaged property minus depreciation and your deductible.

Depreciation accounts for the natural wear and tear or the age of an item. This means the older something is, the less it’s worth. To calculate ACV, you take the replacement cost of an item and subtract the depreciation value. With a standard homeowners policy, personal property coverage, or Coverage C, typically pays out on an ACV basis.

For example, if a hailstorm damages your 10-year-old roof, the insurance company won’t pay to install a brand-new roof with ACV coverage. Instead, it’ll calculate the cost of a new roof and subtract the value lost over the last decade due to age and wear, leaving you with a lower payout.

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How actual cash value works

Depreciation plays a major role in determining how much you’ll receive after a claim. Returning to the example above, say a hailstorm damages your 10-year-old roof and the estimate to replace the roof is $10,000. The life expectancy of your existing roof is 20 years, meaning the roof lost around 50% of its value before the hailstorm.

If your homeowners insurance policy provides ACV coverage, your insurance company will only pay $5,000 toward the new roof (minus a further deductible). You’ll need to cover the remaining amount out of pocket.

That’s fine if you know the trade-off when you purchase the policy and have money set aside to cover potential claims. But it’s not so nice if you didn’t realize your policy wouldn’t cover the full cost of a claim.

Pros and cons of ACV

Here’s a look at the pros and cons of ACV coverage to help you decide whether such a policy is right for you.

What is replacement cost coverage?

Replacement cost coverage is a type of home insurance policy that pays to repair or replace your property without factoring in depreciation. Unlike ACV, replacement cost coverage ensures you receive enough money to restore your home or belongings to their original condition, regardless of age. This is sometimes called recoverable depreciation.

This type of coverage usually applies to dwelling and other structures coverage (Coverages A and B) of a standard home insurance policy.

For example, if a hailstorm damages your 10-year-old roof and it needs replacement, the insurance company pays the full cost of a new roof minus your deductible. Your insurer won’t reduce your payout due to the roof’s age or wear and tear if you have replacement cost coverage.

Although premiums for replacement cost coverage tend to be higher, this coverage might be the right choice if you care more about being fully covered than saving money on your monthly premiums.

How replacement cost works

Insurance companies base claim payouts for replacement cost policies on the current cost to repair or replace the damaged property — up to your policy limits — without considering depreciation.

For example, say hail damages your 10-year-old roof. The replacement cost is $10,000, and you have a $1,000 deductible. Your policy will cover $9,000. In contrast, an ACV policy might only cover $4,000 after accounting for depreciation and your deductible.

To get the full payout on a replacement cost policy, you must insure your property for at least 80% of the cost to rebuild your home. If your limits are less than 80% of the replacement cost, your insurance company will only pay part of any repair bill, proportional to the amount of coverage you have.^[2] This payout reduction applies only with a partial loss. For a total loss, your insurer will pay up to your limits.

Pros and cons of replacement cost

Here are some pros and cons of replacement cost policies to consider in case it’s a better fit for you.

Actual cash value: Best for lower premiums

Choosing an ACV policy is practical when your priority is saving on premiums. It might also be the right choice for you if:

• You have an emergency fund to cover the difference between any insurance payout and the cost to repair or replace your property.

• You don’t have a lot of valuable personal items, like rare books, collectibles, or memorabilia.

• You own your home outright, so you don’t have a mortgage lender that requires you to carry replacement cost coverage.

• You have a newer home, so it’s less vulnerable to claims due to old electrical, plumbing, and HVAC systems.

Replacement cost value: More comprehensive coverage

Replacement cost policies offer greater financial stability after a loss because they cover the full cost to repair or replace your home and belongings without deducting for depreciation. This coverage ensures you can fully restore your property to its pre-loss condition, providing peace of mind.

Replacement cost is your best option if:

• You want to make sure you can restore your home and personal property without paying a lot out of pocket.

• You don’t have a lot of savings or you have a lot of debt, and covering significant out-of-pocket costs after a claim would stress you financially.

• You have a low tolerance for financial risk.

• Your mortgage lender requires you to carry replacement cost coverage.^[3]

While the premiums for replacement cost policies are usually higher than those of an ACV policy, it’s worth the investment if you value financial security and a more substantial insurance payout after a claim.

ACV vs. replacement cost: Which should you choose?

The main difference between ACV and replacement cost coverage is how much you’ll receive in a payout after a claim. ACV policies take depreciation into account, leading to lower payouts but offering more affordable premiums. On the other hand, replacement cost policies provide more financial protection but at a higher cost.

When choosing between these coverage options, consider your budget, the value of your home and its contents, your risk tolerance, and how much you’re willing and able to cover after a loss.

If you’re worried about the cost but don’t want to take on too much risk, consider choosing a replacement cost policy with a higher deductible. Raising your deductible from $500 to $1,000 can reduce your premiums by as much as 25%.^[4]

Extended replacement cost policies can provide even more coverage. These policies have an endorsement promising your insurance company will pay a certain percentage over your limit to rebuild your home.

Ultimately, there’s no one-size-fits-all answer. The best option depends on your financial situation and how much risk you’re comfortable taking. The key is to find a balance between affordability and protection.

Premium costs for ACV vs. replacement cost

Premiums for ACV policies are generally lower than those for replacement cost policies. This is because insurance companies take on less risk with ACV policies, as they only pay an item’s depreciated value.

While the lower premiums for an ACV policy might seem attractive, the trade-off is you may face higher out-of-pocket costs after a claim. Since ACV accounts for depreciation, you’ll likely receive a smaller payout, leaving you responsible for covering the difference to fully repair or replace your damaged property.

Replacement cost policies are more expensive, but they provide the security of a larger payout when you need it most.

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Claims process for ACV vs. replacement cost

When you need to file a claim under either an ACV or a replacement cost policy, the process begins the same way: You report the damage to your insurance company, an adjuster assesses the loss, and the insurance company calculates the payout.

But you may want to negotiate to get a higher payout if you have an ACV policy. Returning to the damaged roof example, say your insurance company estimates 75% depreciation on the roof and only wants to pay you $2,500 for a $10,000 loss. You may be able to argue that the roof was in better condition before the loss. If you can get your insurance company to agree to only take 50% depreciation, it’ll cover more of your claim.

ACV vs. replacement cost FAQs