What is the difference between actual cash value and replacement cost

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Homes are one of the largest purchases that you make in a lifetime. As a homeowner, being open to learn the best ways to protect your investment is key to choosing the right coverage for you and your family. Unfortunately, many homeowners do not learn the difference between Actual Cash Value, Replacement Cost and Depreciation until a claim occurs.

• Actual Cash Value (ACV) is when your insurance company only pays for what your property is worth at the time that you file a claim. Actual cash value is the price or value your item could be sold for today. It is the cost that you paid for the item minus any depreciation. This means at the time of a claim, the settlement from an insurance carrier traditionally will payout less than what it costs to replace the current item. ACV policies traditionally cost less than Replacement Cost polices, however, at time of the claim, the ACV policy will have lower reimbursement.
• Replacement Cost Value (RCV) is the opposite of ACV. This coverage does not consider depreciation and fully pays your property’s replacement costs.  With RCV, you are reimbursed with comparable quality.

As a homeowner, these options are very important to consider. The most comprehensive way to replace an item or rebuild a home is utilizing a Replacement Cost Value. The additional cost of a Replacement Cost policy vs an Actual Cost Value policy is minimal compared to the possible loss of reimbursement with an Actual Cost Value claim.

Potential Real-World Example:

A $15,000 roof that is 10 years old and the home policy has a $1,000 deductible.

• If a covered event destroys your roof and you have Actual Cash Value coverage that depreciates the roof’s value by $600 per year, your out-of-pocket cost of replacing the roof would be $15,000 minus $7,000 (the Actual Cost depreciation of $6,000 and your $1,000 deductible), leaving you with an $8,000 reimbursement.
• A Replacement Cost Value policy would only have you paying $1,000 out-of-pocket for the deductible and give you a $14,000 reimbursement.

Have you evaluated what your home policy covers and the potential out-of-pocket costs that you could be subjected to?  It is better to know what to expect in the event of a covered claim than to be caught by surprise. At AssuredPartners, we educate clients regarding the differences of these and how they impact the amount of the payout. To learn more, visit AssuredPartners Personal Insurance.      

Actual cash value definition

Actual cash value (ACV) is the amount to replace your damaged or stolen property, minus depreciation, at the time of the loss. It doesn't replace what you lost — instead, it reimburses you for the item's current value. To determine an item's ACV, an insurance adjuster will take the cost of replacing your damaged or stolen property and reduce the cost of the property based on depreciation, such as age and wear and tear.

Replacement cost value definition

Replacement cost value (RCV) is what it costs to replace damaged or stolen property without depreciation. If your personal belongings are stolen, damaged or destroyed in a covered loss, and your policy includes coverage for RCV, your insurer will reimburse you for the full cost to replace the items at their current price.

What's the difference between replacement cost vs. actual cash value?

Replacement cost value in insurance pays you for what it costs to replace your damaged belongings with similar items. Actual cash value pays you for what your current items are worth in their depreciated state. For example, say you bought a couch for $3,000 five years ago, and now it's worth $1,500. If it's damaged in a claim, here's what you'll get:

• Actual cash value

  You'll get $1,500 because that is your couch’s actual value after five years of depreciation.

• Replacement cost value

  You'll get the value of a brand new couch (similar model), which could be more or less than what you originally paid.

RCV vs. ACV on homeowners insurance

Your home (also called your physical structure)

Your home is covered under your dwelling coverage (also called "Coverage A"). The amount of dwelling coverage is usually based on the cost to rebuild your home. Most standard home insurance policies cover your home at RCV. For example, if your home is damaged from a covered event and your policy's dwelling coverage is $250,000, you may receive up to that amount to rebuild or repair your home.

Your belongings (also called your personal property)

Your belongings are covered under personal property coverage on your policy. When insuring your belongings (meaning everything you own inside your home and in storage), you may choose between ACV and RCV. Most insurance policies provide coverage on an ACV basis, but for an added cost, you can often purchase replacement cost coverage. For example, if you paid $5,000 for a new couch 10 years ago, and it got destroyed in a fire, the RCV option would typically pay what it costs to replace your couch, which could be more or less than $5,000, minus your deductible.

Learn more about homeowners insurance coverages.

Extended replacement cost for home insurance

With some insurers, you'll have the choice to purchase increased dwelling coverage for your homeowners policy. Also known as "increased replacement coverage," extended replacement cost coverage ranges between 25% and 50% in additional coverage. For instance, if your home's dwelling coverage is $150,000 and you bought an extra 25% in increased replacement cost coverage, you would have up to $187,500 in dwelling coverage.

Note that increased replacement cost is intended to cover increases in the price of construction and not upgrades. For example, if a hurricane devastated the town you live in, the demand for materials and labor would often rise — as would the cost of rebuilding or repairing your home.

Guaranteed replacement cost for home insurance

Some insurers offer guaranteed replacement cost coverage, which pays the full cost of replacing your home/property, even if the cost is more than the limits on your policy. Unlike increased replacement cost, there is no specific limit for the additional coverage. However, insurers typically cap guaranteed replacement cost at 20% above the amount of your home's insured value.

RCV vs. ACV on auto insurance

RCV on an auto insurance policy

An option for replacement cost isn't always available for car insurance. RCV policies can be a good but costlier way to guard against auto depreciation for those companies that offer them, as cars may lose around 10% of their value upon purchase.

ACV on an auto insurance policy

You probably already know that a new car's value begins to drop as soon as you drive it home for the first time. That means if you total your car, your auto insurer is unlikely to consider the sticker price as the actual cash value of your vehicle. Most auto insurers will look at your car's age and mileage plus wear and tear when assessing how much your car is worth and, ultimately, the payout on your claim. At Progressive, we understand this can be a stressful and sensitive process, so we work with a third party to determine an accurate value.

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