Replacement cost vs. actual cash value

Replacement cost vs. actual cash value

December 05, 2019

On homeowners, renters, or condo policies, your property and belongings may be insured for the actual cash value (ACV) or replacement cost (RCV). The replacement cost is simply the price of replacing property or a belonging. The actual cash value is the current value (with depreciation). You may have the option for replacement cost value on auto, motorcycle, and boat policies as well.

Example of RCV vs. ACV in insurance

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 protected by dwelling coverage (also called “Coverage A”). The amount of dwelling coverage is usually based on the cost to rebuild your home. Most standard policies cover your home at RCV. That means if your home is insured up to $250,000, then you may get up to that amount to rebuild if your home is destroyed. Just make sure your dwelling coverage amount is enough to cover you in case a complete rebuild is necessary.

Your belongings

Your belongings are covered by “personal property” coverage on your policy. When insuring your belongings (meaning everything you own inside of your home and in storage), you can choose between ACV and RCV. Most insurance policies default as ACV, but you can usually switch to RCV for an increased price. For example, if you paid $5,000 for a new couch 10 years ago, and it was 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.

Which option is best?

Like most insurance questions, it depends on your situation. Actual cash value insurance is usually the more affordable option. But, ACV may not offer enough coverage if something is damaged. The payout amount you’ll get from your insurer will likely be higher with replacement cost insurance. So, it’s a trade-off.

Talk through your options with a local agent today. We look forward to working with you and making sure you get the best coverage for the best price.