Replacement cost vs. actual cash value: What's the difference?

Replacement cost value (RCV) and actual cash value (ACV) refers to how insurers reimburse you on a claim. An RCV policy pays to replace damaged or stolen property with something new and similar, while ACV only covers the RCV minus depreciation.

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Pat HowardManaging Editor & Licensed Home Insurance ExpertPat Howard is a licensed insurance expert and managing editor at Policygenius. Pat has written extensively about the home insurance industry and his insights as a subject matter expert have appeared in several top tier publications, including The New York Times, The Wall Street Journal, CNBC, and Reuters. Pat has a bachelor's degree in journalism from Michigan State University.

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Jennifer GimbelJennifer GimbelSenior Managing Editor & Home Insurance ExpertJennifer Gimbel is a senior managing editor at Policygenius, where she oversees all of our insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.
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Michael Reynolds, CSRIC®, AIF®, CFT-I™Michael Reynolds, CSRIC®, AIF®, CFT-I™Financial AdvisorMichael Reynolds, CSRIC®, AIF®, CFT-I™, is a financial advisor, principal and founder of Elevation Financial, host of the weekly personal finance podcast Wealth Redefined®, and a member of the Financial Review Council at Policygenius.

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When you make a homeowners insurance claim and it's covered under your policy, the insurer will either reimburse you for the replacement cost or actual cash value of your damaged or stolen property.

A policy with replacement cost value covers what you'd have to pay if you went to the store and replaced everything with newer version at today's prices, while a policy with actual cash value would reimburse you for the amount that your property is worth at the time of the damage or theft.

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Most home insurance policies automatically cover damage to your home or other structures on your property at their replacement cost, while belongings (like your TV or personal laptop) are covered at their actual cash value by default — though you may have the option of adding extended dwelling or replacement cost personal property coverages to your policy for an additional fee.

Coverage

Default loss settlement type

Optional upgrade

Cost to upgrade

Dwelling

Replacement cost

Extended or guaranteed replacement cost

~$50 to $100 per year, sometimes more

Other structures

Replacement cost

Extended or guaranteed replacement cost

Included with dwelling cost

Personal property

Actual cash value

Replacement cost

~$25 to $50 per year

Availability and cost of optional coverages can vary depending on your state and insurance company.

Replacement cost value (RCV) pros & cons

Replacement cost value reflects the cost of reimbursing you for property loss with something similar at today's prices — without deducting depreciation from your claim payout.

In other words, if your laptop is stolen and you make a theft claim with replacement cost value personal property coverage, the insurer would reimburse you for whatever a new version of your laptop costs today.

Most home insurance policies come with replacement cost dwelling and other structures coverage, and actual cash value personal property coverage by default. Most insurers will let you upgrade to replacement cost personal property coverage. However, because this coverage is more comprehensive you'll likely be charged a higher premium.

Additionally, when you make a claim with RCV coverage, most insurers will issue your claim payout in two checks: One for the actual cash value of your property, and then one for the recoverable depreciation of the property once you’ve expended the actual cash value funds. Here’s a look at how these three concepts work.

Recoverable depreciation

Actual cash value

Replacement cost value

What it is

The amount your home or property has depreciated in value since you first bought it.

The value of your property minus depreciation, or wear and tear.

The value of your property without deducting depreciation.

How to calculate

Replacement cost – actual cash value = Recoverable depreciation

Value of property – depreciation = Actual cash value

Actual cash value + recoverable depreciation = Replacement cost value

Learn more >> How to estimate a home's replacement cost

Actual cash value (ACV) pros & cons

Actual cash value is the cost of replacing an item minus depreciation, or how much the item decreased in value from the day you purchased it until the day of the loss. In other words, if your belongings are stolen or damaged by a covered peril and you file a claim, your insurer will factor in the property’s age or physical condition into how much they ultimately reimburse you for the loss.

For example, say a basement pipe bursts and floods your basement, damaging all of the furniture you purchased when you moved in five years ago. Your insurer would likely consider the loss to sudden and accidental water damage, which is covered under most policies, and help pay to replace your furniture. However, a policy with actual cash value coverage would only reimburse you for the value of the furniture set after deducting five years of depreciation from its current replacement cost.

Because most modern home furnishings depreciate in value over time, ACV coverage will often get you a significantly lower claim payout compared to if you had RCV coverage.

Conversely, if you own mostly rare or expensive items or valuables that tend to appreciate in value over time, or if you live in an older home constructed with hard-to-find materials and ornate features, actual cash value may actually provide a larger payout since the reimbursement would reflect the current market value of the appreciated property. With RCV, the insurer would likely only reimburse you the cost of a modern (and lower cost) replacement.

How to calculate actual cash value

Most insurers use an actual cash value formula to determine an item’s depreciated value, but a property’s ACV basically comes down to these two steps:

  1. Calculate what it would cost to replace the property with something of similar kind and quality at today’s prices. This is also known as its replacement cost.

  2. Subtract depreciation for age or wear and tear from the property’s replacement cost.

Depreciation is calculated based on an item’s lifespan, or how many total years of value it has. For example, if your five-year-old furniture set had a lifespan of 15 years, then you’d only be reimbursed for two-thirds of what you originally paid for it.

Shop actual cash value & replacement cost home insurance options

Which is better: Actual cash value or replacement cost?

In terms of the overall value it provides, replacement cost is a far superior form of coverage than actual cash value.

An RCV policy will help replace damaged or stolen property with new items, while ACV will only cover the depreciated amount, meaning you’ll have to pay more out of pocket to replace everything brand new at today's prices.

If you have the financial flexibility to pay an additional $25 to $50 dollars in annual premiums, you should consider upgrading to replacement cost personal property coverage.

Actual cash value vs. replacement cost roof coverage

Some insurers will only pay the replacement cost of a damaged roof if it’s under 15 years old. If the roof is older than 15 years or has visible cosmetic wear and tear, the insurer may only agree to cover the roof at its actual cash value.

Depending on your insurance company, you may be able to upgrade to RCV roof coverage for an additional fee. Otherwise, you may need to first repair or replace your roof to be eligible for this coverage.

What is extended replacement cost coverage?

If you live in an area prone to natural disasters, you may want to consider adding extended replacement cost coverage to your policy to compensate for demand surge, or higher replacement costs in the aftermath of a disaster. 

Extended replacement cost increases your home’s coverage limit an additional 25% or 50% (whichever one applies to your policy) in the event your house is destroyed and your dwelling limits aren’t high enough to rebuild your house to its original specifications. That means if your house is insured for $500,000 with an additional 25% in extended replacement cost coverage, you’d actually be insured for $625,000.

What is guaranteed replacement cost coverage?

Guaranteed replacement cost is similar to extended replacement cost, only there’s no 25% or 50% cap on how much it will pay out. In other words, it covers the cost of rebuilding your home regardless of the cost — even if it’s two or three times your policy’s dwelling coverage limit. 

Shop actual cash value & replacement cost home insurance options

Author

Pat Howard is a licensed insurance expert and managing editor at Policygenius. Pat has written extensively about the home insurance industry and his insights as a subject matter expert have appeared in several top tier publications, including The New York Times, The Wall Street Journal, CNBC, and Reuters. Pat has a bachelor's degree in journalism from Michigan State University.

Editor

Jennifer Gimbel is a senior managing editor at Policygenius, where she oversees all of our insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

Expert reviewer

Michael Reynolds, CSRIC®, AIF®, CFT-I™, is a financial advisor, principal and founder of Elevation Financial, host of the weekly personal finance podcast Wealth Redefined®, and a member of the Financial Review Council at Policygenius.

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