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

Wed Aug 08 2018

Home insurance typically covers your losses in one of two ways: by insuring your property for its replacement cost or its actual cash value. Both can help you recover after a loss, but you want to understand the difference so you know what you’re getting when you buy your policy.

The difference between replacement cost vs. actual cash value

In homeowners insurance, replacement cost and actual cash value are different methods for determining the value of your property. A replacement cost valuation means your insurance company pays what it would cost to replace your home today using current prices, minus your deductible. Actual cash value, however, uses the value of your home minus depreciation to determine the maximum amount your insurer pays.

Knowing the difference between replacement cost and actual cash value can help you decide if you’re getting a good deal. Actual cash value policies are often less expensive, but they don’t provide as much coverage in a loss. And imagine learning that tidbit when you have to file an insurance claim!

Calculating replacement cost value

Replacement cost value is the cost of rebuilding or replacing your home with materials of a similar type and quality at today’s prices. At Kin, our agents evaluate the various features and characteristics of your home, such as the:

  • Type of walls.
  • Square footage.
  • Type of floors.
  • Number of corners.
  • Type of countertops.
  • Building materials.

We also look at the cost of construction at the time you’re applying for coverage. Once we crunch the numbers, we generate a replacement cost estimate (RCE) of your home. The RCE reflects how much it would cost to replace your entire home with the similar materials today.

Moreover, we regularly recalculate RCEs in case there are any changes in the marketplace. This helps ensure that our premiums are fair and accurate, and that your home is adequately protected.

Keep in mind that there's a difference between replacement cost vs. the market value of the home which can be higher or lower than the cost to rebuild it

Is replacement cost insurance enough?

Even with the annual updating of the replacement cost estimate, there may be instances when the home is underinsured. This can happen when the cost of building materials or supplies spike, as lumber did in 2021, or when new ordinances that cause the rebuilding to be more expensive.

Kin members can protect against this situation by adding an endorsement to their policies called a Specified Additional Amount of Insurance for Coverage A. This plus our law and ordinance endorsement creates a "cushion" in case you have a total loss where circumstances push the cost of a replacement over the amount provided in your dwelling coverage.

Calculating actual cash value

While a replacement cost valuation is based on what you would have to pay to rebuild your home in today’s market conditions, actual cash value (ACV) is the cost to rebuild your home minus depreciation. Depreciation is the amount of value your home loses over time due to age or wear and tear.

If your policy insures your home and personal property for its actual cash value and you experience a loss, then it’s helpful to have receipts for your items as well as descriptions of the make and model. That way, you have a better chance at getting a reasonable payout when the claims adjuster determines the actual cash value of the damaged items.

What if I don’t agree with the ACV?

You can dispute the adjuster’s assessment of the value of your damaged items, but you’ll need documented proof to strengthen your case to the insurer. A good way to do this is to take a home inventory before you even get insured. Not only can that help should you have a claim, but it gives a better idea of how much personal property insurance you need.

If you don’t have any way of showing what your personal property is worth, then the adjuster or your insurance company will offer their best estimate of the value of the items you have lost. You’ll get a quote of this estimate before you’re issued payment.

Replacement cost vs. actual cash value: Which is better for me?

Choosing the right valuation method depends on your objectives. If you want an easier time replacing lost or damaged items or rebuilding your home, replacement cost coverage is the clear winner. Though it costs a little more, this type of coverage offers you the means to replace your property with items of a similar quality.

On the other hand, home insurance based on your property’s actual cash value can be less expensive. That may be the right choice if you’re on a tight budget. However, you should know that you may not get enough to replace all of your items or rebuild your home to its current condition if you experience a loss.