Replacement Cost vs. Actual Cash Value

On homeowners, renters, or condo policies, your property and belongings may be insured for either your property's actual cash value (ACV) or replacement cost value (RCV). Replacement cost value is the amount it will take to replace your property or belongings without any deduction for depreciation. Actual cash value is the replacement cost value, minus depreciation. You may also have the option to be insured for replacement cost value on automobile, motorcycle, and boat policies.

What is replacement cost value (RCV)?

Replacement cost value (RCV) is what it costs to replace your damaged or stolen property, regardless of depreciation. If your personal belongings are stolen, damaged or destroyed in a covered loss, and your coverage is for the RCV, your insurer may reimburse you for the full cost so you can replace the items with new ones at their current price.

Example: Your home is burglarized, and your television is stolen. Your insurer may pay out the cost to replace the TV that was stolen with a similar brand new one.

What is actual cash value (ACV)?

Actual cash value (ACV) is the amount to replace your damaged or stolen property, minus depreciation at the time of the loss.

Example: If your living room recliner is destroyed in a fire and your personal property claim is settled at actual cash value, your policy may reimburse you for the cost of your recliner at a reduced amount due to the recliner's age and condition. You won't be reimbursed for the same amount it would cost to buy a brand new recliner.

What are the methods to determine ACV?

To determine an item's ACV, an insurance adjuster will start from the cost of replacing your damaged or stolen property and lower the value based on depreciation factors, such as age and wear and tear. The process will vary by insurer, but your adjuster may help you to understand the factors that go into it.

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

Replacement cost value refers to the full cost to replace your items with new ones, while actual cash value refers to 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 due to age and wear and tear. If your couch is damaged in a covered loss, here's what you'll get, depending on if your coverage uses ACV or RCV:

  • Replacement cost value: If a new couch of similar make and model now costs $3,500, that's what you'll get to replace your damaged couch.

  • Actual cash value: You'll get $1,500 because that's your couch's actual value after five years of depreciation.

 

Is ACV or RCV a better option?

It depends on your budget, your insurer, and your personal preference. If you're offered a choice, actual cash value may be a more affordable option, but replacement cost value typically offers more coverage. You'll need to decide if you prefer more coverage for a higher premium or less coverage for a lower premium.

 


ACV = Less coverage for a lower price

RCV = More coverage for a higher price

 

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"). Your dwelling coverage amount is usually based on the cost it would take to rebuild your home. Most standard home insurance policies cover your home up to a limit equal to the home's RCV.

Depending on your insurer, you may also have these options for greater protection:

  • Extended replacement cost

Extended replacement cost coverage, also known as "increased replacement coverage," ranges typically 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, not upgrades. For example, if a hurricane devastates the town you live in, the demand for materials and labor may rise, which increases the cost of repairing or rebuilding your home.

  • Guaranteed replacement cost

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 extended replacement cost, there is no specific limit for the additional coverage. However, insurers that offer it typically cap guaranteed replacement cost at 20% over the amount of your home's insured value.

Your belongings (also called your personal property)

Your belongings are covered under personal property coverage on your homeowners policy. When insuring your belongings (meaning everything you own inside your home and in storage), you might be able to choose between ACV and RCV. Most insurance policies default to ACV for personal property, but for an added cost, you can often purchase replacement cost coverage.

Learn more about homeowners insurance coverages.

RCV vs. ACV on auto insurance

Actual cash value: Most auto policies cover your car up to its actual cash value, which tends to depreciate as soon as you drive it home for the first time. In other words, if you total your car right away, your auto insurer is unlikely to consider the sticker price as the actual cash value of your vehicle.

Replacement cost value: Replacement cost value isn't always available for car insurance. If RCV is an option for you, it can help guard against depreciation. Note that your premium will likely increase if you opt to be covered for your car's replacement cost value.

How is my car's actual cash value determined?

Most auto insurers look at your car's age and mileage plus wear and tear when calculating your car's depreciation and ultimately the payout for your claim.

Dan Zeiler

Dan@zeiler.com

877-597-5900 x134

Dan Zeiler