Replacement Cost vs. Actual Cash Value

If you lose your home to a disaster, your insurer can reimburse you for damages with either the replacement cost or actual cash value (ACV). Here's how each works and which one is best.
Craftsman house on a hill

Homeowners insurance seems simple enough at first. It protects your house in the event of damage that a random disaster causes. But not all insurers will reimburse you in the same way. How they reimburse you depends on the level of coverage that you choose. You should understand each level so you have the proper amount of protection.

There are typically three levels of coverage that insurance companies offer. The one you choose will dictate how your insurer reimburses you for any damages your policy covers. In other words, it helps your provider figure out how much money to give you after a loss occurs.

These homeowners coverage levels are:

  • Replacement cost
  • Actual cash value (ACV)
  • Guaranteed or extended replacement cost

In this article, we’ll go in-depth on each level of coverage. You’ll learn why you might choose one over the other. This way you’ll be able to make an informed decision when you choose which one to add to your policy. We’ll also answer some frequently asked questions about replacement cost and actual cash value.

Replacement Cost

One of the levels of protection you can receive in your policy is replacement cost. Of the three levels, it’s the most common option. It means that your insurance provider will pay you an amount equal to the value of your lost items and home. There’s no deduction for depreciation in this case. The only amount you have to pay is your homeowners deductible.

Replacement cost is typically an option for your home and personal belongings. Here’s how it works:

Home or Dwelling

It’s standard for replacement cost to cover the physical structure of your house. It’ll help replace your home using comparable building materials. This can help bring you peace of mind if a disaster destroys it.

It’s a good idea to know how much it’ll cost to replace your home. This includes keeping track of any improvements or updates. Doing so will ensure that your carrier will rebuild your house the way it was before. It’s also possible that your current insurance policy limits won’t cover the replacement cost. Keeping track of building, construction, and replacement costs will help you know if you need to increase your limits.

Personal Belongings

Replacement cost should also cover your personal belongings. This means that your insurer would replace any items in your house in the event of a disaster. You should regularly take inventory of what’s in your home, including the price of each item. This way, your insurance provider will know how much it’ll cost to replace your personal belongings, if necessary.

Actual Cash Value (ACV)

Actual cash value is another way that your insurer can reimburse you. With this coverage level, your insurance company will pay the amount you need to replace your home and property, minus any depreciation. Depreciation is the loss of value of an object or asset. This means you may not get what you originally paid for the item.

Insurers consider age, wear and tear, and “obsolescence” when calculating the depreciation of an object. Because you don’t receive the full replacement cost of the item, it might be hard to get it back. You may end up taking a loss on the item or house if you try to replace it.

Guaranteed Replacement Cost

Guaranteed replacement cost offers you the most protection of the three options. It’s the same as replacement cost, except that it’ll replace your home regardless of your limits. This means you have no risk of paying anything more than the deductible out of pocket.

Per the Insurance Information Institute (III), building costs in your area could rise at any time. Guaranteed replacement cost ensures that you won’t have to pay for any increase in material prices or building expenses. Though, the III says that the type of reimbursement won’t cover any upgrades to get your home up to code.

Not all companies offer guaranteed replacement cost. Some insurance carriers offer an extended replacement cost for your policy. This is where your provider will add an extra layer of protection over your limits. Adding this will protect you even more so you don’t have to pay for any replacement costs yourself. Your insurer might not offer guaranteed or extended replacement cost. It’ll depend on your state. Be sure to check with your agent about what coverage levels you can get.

Which One Should You Choose?

How you want your insurer to reimburse you is an important decision. So, which one should you choose? A good rule of thumb is to try and get as much protection as you need. But this comes at a higher price. Guaranteed replacement cost offers you the most protection, but your premiums will reflect that.

Replacement cost is the most popular option. This is because it makes sure that you’ll receive enough to replace your property, no matter the age. For example, if a storm wrecks your 15-year-old deck, your insurer will pay you enough to replace it. On the other hand, actual cash value would only give you what the deck is worth today. This could leave you paying a lot of your own money to replace it.

Actual cash value is an option for those who want lower rates. Just remember that this puts you at risk of losing your items unless you want to replace them with your hard-earned money. Replacement cost is probably the best deal if you want to ensure you don’t lose your property the way it was.

Endorsements Can Add Extra Protection

In some cases, regular replacement cost won’t be enough to cover a rebuild of your house. The guaranteed version might be an option in your state. But what if it isn’t? Homeowners insurance endorsements can add an extra level of protection.

An endorsement is a policy add-on that goes beyond your current insurance limits. They can help protect you from a random rise in building costs in your area. Or they can help insure valuable and expensive objects that you own, such as jewelry or art. Scheduled property endorsements are a common type that’ll cover expensive personal belongings.

You should keep track of how much it’ll cost to rebuild your house or replace your personal belongings. A good way to keep track of your belongings is to keep a written home inventory checklist. This way you can know whether you’ll need to raise your limits, get an endorsement, or try to get guaranteed replacement cost. Doing any of those three can help you avoid unnecessary roadblocks when you’re getting coverage.

Frequently Asked Questions

Is replacement cost or actual cash value better?

Replacement cost offers more coverage than actual cash value. It’ll give you an amount equal to the cost of replacing your house or personal belongings. ACV will only give you the amount to replace your property while deducting the depreciation. Depending on the item, depreciation could deduct a large amount of cash.

While actual cash value provides fewer benefits to you, it costs significantly less. So, it’s a good option for people trying to make their home insurance more affordable. But replacement cost gives you the most benefits. Because of this, replacement cost is by far the most popular option for homeowners.

Is dwelling coverage the same as replacement cost?

Dwelling coverage is different than replacement cost. Replacement cost refers to your provider giving you enough money to rebuild your home back to its current state. Dwelling insurance refers broadly to your insurer’s protection of your house’s physical structure. Only perils listed on your policy are part of your dwelling coverage.

However, dwelling coverage is part of replacement cost. Replacement cost pays for the rebuilding of your home and possibly other structures on the property. Personal belongings are also part of it. It’ll replace any items that you lose from a random disaster that your homeowners insurance covers.

What if replacement cost coverage isn’t enough to rebuild my house?

Sometimes, your homeowners policy limits aren’t high enough to cover costs of a rebuild. In this case, you’d end up paying for some of it on your own. But you can take precautions to ensure you don’t have to pay more than your deductible. Home insurance endorsements can help add more protection for you. You can also get guaranteed replacement cost if it’s available in your state. This will guarantee that your insurer will replace your house no matter the cost.

To avoid any risk of going over your limits, you should be aware of how much it’ll cost to repair your home. This will help you know whether you should add extra protection. Otherwise, you could end up paying for some of the costs out of pocket.


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