Actual Cash Value vs. Replacement Cost Value (2024) (2024)

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Actual cash value (ACV) coverage describes the cost to replace a stolen or damaged item minus the amount that it has depreciated, or how much it has decreased in market value over time. Insurance companies calculate depreciation based on the normal wear and tear a property sustains over its useful life, or up until the time of the covered loss.

As with any form of insurance, your policy’s deductible and coverage limits will impact your reimbursem*nt amount. Until you meet your policy’s deductible, your provider will subtract that amount from your payout.

Your reimbursem*nt will also be capped according to the coverage limits outlined in your contract. So if you have an annual deductible of $500 and a $2,000 coverage limit, your total payout will be adjusted to cover the deductible and cannot exceed the coverage limit.

If you’ve already met your deductible by filing other claims, you won’t have to worry about paying it again until your policy renews for the year.

Calculating Cash Value

Suppose your house is broken into while you are away, and you come to find your stereo system stolen. With an actual cash value policy, you can file a claim with your insurance provider for the cost of your stolen stereo. But due to depreciation, the reimbursem*nt may only account for a portion of the cost, which is relative to the age and condition of your system.

In other words, your insurance company won’t compensate you for the full cost of a new, replacement stereo system if its value has decreased over time. Here’s an example of how ACV would be calculated in this scenario:

When you first purchased your stereo system five years ago, it was worth $600 brand-new. The stereo has an approximate life expectancy of 10 years. A comparable, newer model is worth $700 in stores today. But because your stolen system is five years into a 10-year lifespan, it has depreciated by at least 50% — or by $300.

If you subtract that $300 from the cost of the current market value, which we established is $700, then an insurance adjuster would appraise the actual cash value of your system at around $400.

Replacement cost value (RCV) refers to the amount it would cost to fully replace an item with the exact same or a similar version at the current market price. Said another way, the replacement cost is what you would have to pay for a new version of a damaged, stolen or destroyed item. Unlike ACV, replacement cost policies do not consider the depreciated value of the item. However, coverage limits and deductibles still apply.

Calculating Cost Value

Consider the same stereo system example as above. Even though your stereo was five years old at the time of loss, you don’t have to worry about depreciation with RCV coverage — the replacement value of your stereo system would be based on its current market value. So if a comparable model is priced at $700 today, that’s how much you would receive back. But keep in mind that your total payout will be adjusted based on your policy’s deductible and coverage caps.

Types of Replacement Cost Value Coverage

In addition to the standard plan we’ve described above, replacement cost coverage is offered as a policy endorsem*nt or add-on. You will typically have the option to purchase RCV through the following home insurance add-ons:

• Extended Replacement Cost Coverage:Increases coverage amounts if your property is severely damaged or destroyed in a sudden disaster and rebuilding costs exceed your policy’s limits. Allows you to raise your coverage caps by 10%–15% to avoid paying the difference out-of-pocket.

• Guaranteed Replacement Cost Coverage: Ensures reimbursem*nt for the total cost to rebuild your home if it is damaged or destroyed by a covered disaster, regardless of your policy’s coverage limits. Though this add-on can be expensive, it may be a worthwhile investment for homeowners in high-risk areas for natural disasters.

• Modified Replacement Cost Coverage: Typically offered as an RCV alternative for older homes with ornate and original features, this coverage will pay for repairs and replacements using modern-day materials and techniques.

Although we usually recommend replacement cost value coverage because it helps you get a new item of similar quality when you file a claim, it comes at a higher cost and might not be the best option for every homeowner. It is best to assess your needs and preferences to decide which coverage suits you better.

For Homeowners Who Want a Cheaper Policy

A policy with actual cash value coverage is ideal for people who want to save money on premiums. It costs less because it factors in an item’s depreciation over time. For instance, if a policy with ACV coverage costs $1,000 per year, you might have to pay 10% to 20% more for a policy with RCV coverage.

For Homeowners Who Want To Limit Risk

Those who want to limit risk may prefer a policy with RCV coverage because it will replace your items with similar ones of the same quality. You will have peace of mind knowing you won’t have to pay for a new item out of pocket. However, your insurance company will still subtract your deductible from your payout.

See the table below to understand the difference in the cost of covered loss with ACV and RCV.

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