Actual Cash Value Vs. Replacement Cost [Know Your Coverage]

You return home after a busy day and find ransacked rooms, broken glasses, and stolen possessions. It's disheartening to realize you have been burglarized. 

Luckily, you have homeowners insurance.

However, here's the dilemma: Will your insurance pay enough to get new items to replace what was stolen? Or will you only get a portion of what you paid for them?

Knowing between different coverage options, i.e., actual cash value (ACV) vs. replacement cost (RCV), can help you choose the right insurance.

This article will explain everything about replacement cost vs ACV homeowners need to know to make informed decisions. 

Key takeaways

• RCV vs ACV insurance are two methods insurers use to calculate claim payouts.
• When it comes to home insurance ACV vs RCV, actual cash value pays for the item's depreciated value at the time of loss. In contrast, replacement cost covers the amount needed to replace the item with a new one of similar type and quality.
• You have additional options to increase coverage within replacement cost coverage, such as extended and guaranteed replacement costs.
• Homeowners can also choose additional endorsements from Scheduled Personal Property to Equipment Breakdown Coverage to protect valuable items. 

What is actual cash value?

Actual Cash Value (ACV) coverage calculates a claim payout for a damaged or lost item – minus depreciation at the time of the loss. 

Depreciation is the decrease in an item's value over time due to wear and tear. It means the payout you get might be less than what it costs to replace that item with a brand-new one. 

ACV is often found in homeowners insurance policies under coverages for personal property and other structures.

Note: As with any insurance, your deductible and coverage limits affect your reimbursement. The deductible amount is subtracted from your payout until it is met.

How is depreciation calculated?

Suppose your home was broken into when you were away, and your stereo speaker system was stolen. 

With an ACV policy, you can file a claim with your insurance for the cost of the stolen stereo. However – because of depreciation – you may only get reimbursed for part of the cost, depending on its age and condition.

This means your insurance will not cover the full cost of a new stereo if its value has decreased over time. 

Consider this example: You bought your stereo speaker system five years ago for $600, and it has a life expectancy of 10 years. A similar, new model costs $700 today. Since your stolen stereo was five years old, it has depreciated by 50%, or $300. 

So, if you subtract $300 from the $700 current market value, the insurance would value your stereo at around $400.

What is replacement cost?

Replacement cost coverage enables you to replace lost or damaged items with new ones of similar kind and quality. 

It doesn't factor in depreciation, which means you get the full replacement cost, regardless of the item's age or condition – minus your deductible.

This coverage ensures you can restore your property to its original state. It's usually included in homeowners insurance policies under dwelling and personal property coverage.

How is recoverable depreciation calculated?

If you have a Replacement Cost coverage policy, the insurance provider might first pay you the ACV. After you repair or replace the item and submit the receipt(s), they will reimburse you for the additional money you spent. 

This is called "Recoverable Depreciation." It's crucial to understand how your policy handles replacement costs.

Let's revisit the example with the 5-year-old stereo speaker system. With replacement cost coverage, the policy would pay for the new stereo system of similar quality and features.

If a comparable model costs $700 today, you would first receive the ACV of your old system ($400 in the previous example) – minus the deductible. 

This will help you replace and purchase the new stereo system. Once you buy it, submit the receipt to your insurance company and get the second payment to cover the difference.

What is the difference between actual cash value (ACV) and replacement cost (RCV)?

Wondering what is the difference between RCV and ACV? Although there are many, the key difference between ACV and replacement cost is depreciation.

ACV typically applies to personal property coverage, while RCV can be used for both dwelling and personal property coverage. ACV also factors in depreciation before payout, potentially leaving you with out-of-pocket costs to replace the item.

For example, if you bought a mattress (along with a bed frame) four years ago for $2,500, they might only be worth $1,500 today due to depreciation. 

With ACV coverage, you'd get $1,500 (minus your deductible) if you file a claim. In contrast, replacement cost coverage reimburses the full cost to replace your items, reducing your deductible.

Other coverage options

By default, the replacement cost policy pays to reconstruct, repair, or replace the property – up to the policy's limit.

If you require more money, there are other coverage options you can choose to provide even more protection for your home and belongings.

Extended replacement cost

Extended replacement cost coverage policy is an optional add-on to the home insurance coverage. It helps cover rebuilding costs if they exceed your policy limit.

For example, if your house is insured for $400,000 but costs $475,000 to reconstruct after a fire, your insurance would normally cover up to $400,000 – minus your deductible. This leaves you with an additional $75,000 to pay.

With extended replacement cost coverage, your insurer could pay an additional 20% to 25% over the policy limit. So, with 20% extra coverage, they would cover up to $460,000, leaving you with $15,000 to pay rather than $75,000.

Guaranteed replacement cost

Homeowners who seek maximum coverage can often purchase a guaranteed replacement cost coverage policy as an add-on. 

This ensures they can repair or rebuild their home to its original condition. It covers the full cost (minus deductibles) to restore the home to its original size, finishes, and specifications. 

For instance, if your coverage limit is $400,000 but rebuilding costs $475,000, you would normally pay the difference. However, with guaranteed replacement coverage, the additional cost is covered. 

The deductible is the only out-of-pocket cost. Most policies even allow for minor improvements, like adding a deck.

Note: These policies aren't available in all states and with all plans. Check with your local providers to see if they offer them.

Additional endorsements to consider

Standard homeowners insurance policies may offer limited coverage for specific valuable items.

If you need more specific coverage options to properly ensure them, you can consider these additional endorsements to enhance your policies, such as:

• Scheduled Personal Property: Scheduled personal property coverage is an insurance rider that homeowners can include in their current policy for added protection of valuables such as tech, jewelry, and antiques. This coverage works in two ways: it increases policy limits to cover more expensive items and protects them against a broader range of hazards.
• Jewelry Insurance: Jewelry insurance provides specialized coverage for high-value jewelry, such as engagement rings, necklaces, diamond rings, and watches. It covers damage, theft, accidental loss, and sometimes mysterious disappearances. If something happens, the insurance pays to fix or replace your jewelry.
• Equipment Breakdown Coverage: Equipment breakdown coverage helps cover the cost of repairing or replacing essential home systems and appliances if they break down due to electrical or mechanical failures. 

Which is better - RCV or ACV?

Although it's better to have replacement cost value (RCV) coverage as it helps you get new items of similar quality and features when you file claims, it costs more and may not be perfect for all homeowners. 

So, is it better to have ACV or replacement cost? It varies based on your needs, preferences, and budget.

Let's find which coverage between homeowners insurance replacement cost vs ACV suits you better.

• For Homeowners Seeking an Affordable Policy: An ACV coverage policy is a good fit if you want to save some dollars on premiums. It will cost you less as it considers an item's depreciation. For example, if the policy with ACV costs $1,000 per year, replacement cost value coverage may cost 10% to 20% more.
• For Homeowners Looking to Limit Risks: RCV is a good choice if you want to curb risks. It replaces your items with ones of the same quality. This can help ensure that you don’t have to pay for new items out of pocket. But remember, your insurance provider will subtract your deductibles from the payout.

Still have questions?

Curious to know more about ACV vs RCV home insurance? Here are some frequently asked questions about ACV vs RCV insurance.

How do you know if you have ACV or RCV?

Review your homeowners insurance policy or contact your insurance provider to determine whether you have RCVt vs ACV. The policy details should specify the type of coverage for your dwelling and personal property.

Does replacement value include depreciation?

No, replacement value doesn't include depreciation. It covers the full cost of replacing an item with a new one of similar type and quality without considering wear and tear.

How does ACV insurance work?

ACV insurance works by calculating the current value of your damaged or lost item, considering depreciation. This means the payout will be less than the amount needed to replace the item with a new one.

Say you purchased a television two years ago for $1,000, and a recent power surge ruined it. If your personal property insurance uses ACV, and the TV's value has depreciated by half, you will only receive $500, minus any deductible.

What is a replacement cost example?

Let's say your TV – originally purchased for $800 – is destroyed. With replacement cost coverage, your insurer would pay the amount needed to buy a new TV of similar type and quality, regardless of its current market value or age.

Why is the rebuild cost more than the market value?

Rebuild costs can be higher than market value due to increased material and labor costs and the need to meet current building codes. Market value is based on what buyers are willing to pay for a property, which can be influenced by location and real estate trends.