Actual Cash Value vs. Replacement Cost for Homeowners Insurance

Homeowners, confronted with a significant property loss, property damage, or some other disaster, are often blindsided by the terms of their homeowner’s insurance. They might only receive a small fraction of the listed maximum coverage.

By the time you make an insurance claim, it’s too late to negotiate better terms or find another insurer. Instead, you can take measures beforehand to get the best deal out of your insurance company.

We break down the fine print of your insurance policy by detailing the difference between actual cash value vs. replacement cost.

• Actual Cash Value
• Replacement Cost Coverage
• What’s the Difference?
• How Do Insurance Companies Determine Actual Cash Value vs. Replacement Cost?
• Which Policy to Choose

Actual Cash Value (ACV)

ACV is a common term found in the fine print of home insurance policies and refers to how the insurance company determines payout on claims.

Over the years, different courts have ruled in slightly different ways on what the definition of ACV means, with the main definitions being:

• The actual cash value is the full cost of repair or replacement with a deduction based on depreciation.
• The actual cash value is the fair market price if a buyer and seller were to make a transaction without undue time constraints.

In some cases, courts have ruled in a way that combines the two definitions, but in most situations, insurance companies rely on the first definition: ACV minus depreciation. Despite the calculation of depreciation, insurance companies still calculate the cost of goods based off today’s prices.

For example, if you had to replace power tools stolen from your garage, the insurance company would likely determine the cost to replace the goods today, minus depreciation for the age of the goods.

Replacement Cost Coverage

Replacement cost coverage is typically considered a better deal on an insurance policy than ACV. Unlike ACV, where depreciation comes into play, replacement cost coverage will pay to replace your item with new property that is comparable to what you lost.

Replacement cost coverage is typically considered a better deal on an insurance policy than ACV. Unlike ACV, where depreciation comes into play, replacement cost coverage will pay to replace your item with new property that is comparable to what you lost.

What’s the Difference?

The only difference, at least according to the official definition of actual cash value vs replacement cost, is the depreciation. Replacement cost is considered the superior option because it does not deduct a predetermined amortization before payout.

Actual cash value, while still based on the cost of replacement in today’s world, then subtracts a percentage based on the age of the property getting replaced. Replacing one or two items under an ACV insurance policy might not seem that bad, but imagine replacing your entire home. It can leave homeowners with a significant financial loss.

How Do Insurance Companies Determine ACV or Replacement Costs?

If you haven’t already, now is the time to fill out the item-by-item inventory of your valuables. Most people receive a booklet or an online login after signing up for homeowners insurance where you to log all your valuables, including date of purchase, brand, purchase price, and any other helpful details. Most people, it’s fair to assume, don’t go through the trouble.

However, if something does happen to your home or your personal property, this list is crucial. It helps you prove the value of what you lost to your insurance company. Beyond the big-ticket items, like entertainment systems or expensive sporting goods, most people don’t keep receipts. When confronted with property loss, it becomes challenging to remember every item you’ve accumulated over the years. It’s even more challenging to prove their value.

If you have misplaced your homeowner’s inventory worksheet, many insurance companies have theirs available for download online. If not, call the insurance company and request one. It’s recommended to keep multiple files in multiple locations, including with the insurance agency, in a safe deposit box, and an electronic version.

Making a Decision: Actual Cash Value vs. Replacement Cost

If you are getting a new insurance policy, read the fine print. While most people prefer a replacement cost policy over an ACV policy, each insurance company has a detailed definition and specifics worth reviewing. Actual cash value policies are generally less expensive, but when you do need to make a claim, you’ll typically receive less than you would with a replacement cost policy.