5+ years writing insurance and personal finance topics
Auto, home, health, and life insurance expertise
Elizabeth has extensive insurance industry experience, having written for Insureon, Rate Retriever, and Insurify. She’s also finance and insurance editor for Car and Driver.
Evelyn PimplaskarEditor-in-Chief, Director of Content
10+ years in insurance and personal finance content
30+ years in media, PR, and content creation
Evelyn leads Insurify’s content team. She’s passionate about creating empowering content to help people transform their financial lives and make sound insurance-buying decisions.
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Home insurance policies generally pay for insured losses in one of two ways: actual cash value (ACV) or replacement cost coverage. Replacement cost coverage means that your claim settlements won’t include a deduction for depreciation.
If a covered event, like a hurricane, damages or destroys your home, your insurer will reimburse you for the current cost of rebuilding your home back to its previous condition or replacing your personal belongings with brand-new ones of the same type and quality. Replacement cost coverage is beneficial because you receive larger settlements in the event of a covered loss.
But replacement cost coverage can also be more expensive. If you’re wondering whether you need replacement cost coverage, here’s how it works, who should have it, and how you can find affordable home insurance with replacement cost coverage.
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Replacement cost coverage and how it works
Replacement cost is a method of reimbursement for home insurance claims.[1] If you have a replacement cost coverage policy, depreciation won’t affect your claim settlement amounts. Standard home insurance policies automatically include replacement cost coverage for your dwelling, but it’s typically available as an optional add-on for personal property.
For your dwelling, replacement cost is the amount of money it would cost to rebuild the physical structure of the house based on current construction costs, materials, and labor. Generally, your policy’s dwelling coverage amount should match your home’s replacement cost. Otherwise, you risk being underinsured.
If a covered peril damages or destroys your home, you can file a claim with your home insurance company to get reimbursed. Your claim payments won’t reflect your home’s depreciation. Actual cash value payouts deduct depreciation.
Here’s an example of how replacement cost coverage works for dwelling insurance. Imagine your home is 80 years old and gets badly damaged in a natural disaster. Before the event, your home’s replacement cost was valued at $300,000. Even though your home is older, your insurance company would cover the cost of rebuilding the physical structure of your home at today’s costs, with no depreciation for your home’s age or condition.
Here’s an example of how it works for personal property claims. Let’s say you have a 10-year-old TV that gets stolen in a burglary. When you bought the TV, it cost you $2,000. In this case, you could file a claim with your insurance company to get reimbursed for the full $2,000 because your payout wouldn’t be adjusted for the TV’s age or wear and tear.
Types of replacement cost coverage
When you initiate a homeowners insurance policy, you can choose from multiple types of replacement cost coverage. Here are the main ones:
Standard replacement cost coverage
A standard replacement cost coverage policy insures the physical structure of your home up to your dwelling policy limit. Depreciation doesn’t affect claim payouts. For example, if your dwelling insurance coverage limit were $300,000, your insurer would pay up to $300,000 to rebuild your home after a loss.
Extended replacement cost coverage
An extended replacement cost policy provides extra coverage to your dwelling insurance limit. This type of policy will usually pay between 125% and 200% of your dwelling limit. So, if your dwelling coverage limit were $300,000 with 125% extended replacement cost coverage, your insurer would cover up to $375,000.
Guaranteed replacement cost coverage
Guaranteed replacement cost coverage provides the most protection. With this type of coverage, your insurer will cover the full cost of rebuilding your home at today’s cost, even if it exceeds your dwelling insurance limit. Not every insurer offers guaranteed replacement cost coverage.
Replacement cost vs. actual cash value
Replacement cost value (RCV) and actual cash value (ACV) are standard methods for placing a value on insured property. With an actual cash value policy, your insurance claim settlements include a deduction for depreciation, which accounts for age, normal wear and tear, and other circumstances that can affect an item’s value.[2]
ACV coverage is generally cheaper than RCV coverage. But your actual cash value settlements will also be lower. If you need to file a claim, you might be financially responsible for some of your losses out of pocket.
Replacement cost value vs. market value
Replacement cost value and market value are two different things. Replacement cost value is the cost of rebuilding your home back to its original specifications based on current prices. Market value is the amount of money your home would be listed for on the current real estate market.
The replacement cost value is usually less than the market value. The replacement cost of your home only includes the cost of rebuilding the house itself, whereas the market value accounts for factors like the value of your land, its location, comparable properties, and the local school district.[3]
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How insurers determine replacement cost value
Insurers have several different ways to calculate replacement cost, and they use specific formulas to estimate replacement cost value. Here are some factors that contribute to replacement cost:
Size: The square footage of your home is one of the biggest factors that affects replacement cost value. Bigger homes cost more to rebuild, so larger houses usually have higher replacement costs.
Roof condition: Insurers look at the age and condition of your roof. If you have a newer roof, you can expect your home’s replacement cost to be higher.
Interior features: Interior features, like built-in cabinets, flooring, light fixtures, and appliances, all affect the replacement cost value of a home.
Number of rooms: Homes with lots of rooms usually cost more to rebuild and have a higher replacement cost value.
Upgrades: Your home’s replacement cost value will be higher if you’ve recently made upgrades or renovations to major systems or if you’ve added rooms to your home.
Pros and cons of replacement cost coverage
How much home insurance you need depends on many factors. Replacement cost coverage has advantages and disadvantages you should consider.
Pros
Larger payouts when you file a claim: With replacement cost insurance, you’ll receive larger claim payouts, which could reduce your out-of-pocket costs.
Your home will be rebuilt to its original condition: A replacement cost coverage policy can provide enough coverage to rebuild your home back to its previous condition without sacrificing square footage, material costs, and other features.
Cons
Higher premiums: Home insurance with replacement cost coverage is more expensive than policies with actual cash value coverage.
You might have to make repairs before getting reimbursed: Depending on your insurance company, your insurer may require you to replace all your damaged belongings with new items before you can get reimbursed.
Cost of replacement cost coverage
Replacement cost coverage is generally more expensive than actual cash value coverage. And the higher the level of replacement cost you choose, the greater the effect it’ll have on your premium amount. Most home insurance policies are based on replacement cost.
Factors that can affect the cost to repair or replace your property — and therefore the cost of the policy — include your home’s age, square footage, and roof condition. In general, the more it will cost to rebuild your home, the more expensive your replacement cost coverage will be.
Actual cash value policies provide limited home insurance coverage, but the premiums tend to be lower. If you want to save money on a homeowners insurance policy, choosing one with actual cash value can be a good solution. But it’s important to understand that you’ll receive less money from your insurance company in the event of an unexpected loss.
Still have questions about replacement cost coverage and whether you need it? The following information might be helpful.
Should you insure your home for full replacement cost?
Yes. Insurance professionals generally recommend you insure your home to its full replacement cost value. When your home is insured for less than the replacement cost value, you could have to pay out of pocket for some of the repair or rebuilding costs. If your home needs to be completely rebuilt after a covered claim, having replacement cost coverage could help you save money.
Can you switch your home insurance from actual cash value to replacement cost?
Many insurers provide the option to switch from actual cash value to replacement cost value for personal property coverage. This is often called a contents replacement cost coverage endorsement. But adding this endorsement will cause your home insurance premium to increase.
What percentage of a home’s value should be insured?
Insurance professionals generally recommend that you insure your home for at least 80% of its replacement cost value. This is called the 80% rule in home insurance. But insuring your home for its full replacement cost value will provide the most protection. If you don’t buy coverage close to your home’s full value, you might have to cover some rebuilding costs out of pocket.
Can you insure your home for less than the replacement cost?
You can insure your home for less than the replacement cost, but it’s not a good idea. If your home is a total loss after an insured event, you’d likely have to cover some of the costs using your savings. Additionally, if you have a replacement cost coverage policy and your home is insured for less than 80% of its replacement value, your insurer might refuse to pay the full cost to repair, rebuild, or replace your property in case of a partial loss.[4]
Elizabeth Rivelli is a freelance writer covering insurance and personal finance. She has extensive knowledge of various insurance lines, including property and casualty, health, and life insurance. Her byline has been featured in dozens of publications, including Investopedia, Forbes, Bankrate, NextAdvisor, and Insurance.com.
Evelyn PimplaskarEditor-in-Chief, Director of Content
10+ years in insurance and personal finance content
30+ years in media, PR, and content creation
Evelyn leads Insurify’s content team. She’s passionate about creating empowering content to help people transform their financial lives and make sound insurance-buying decisions.
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