If your property or personal belongings are damaged or stolen due to a covered loss, your insurance company will pay to repair or replace the damage. How much they pay out depends on whether your home insurance policy provides for actual cash value (ACV) vs. replacement cost value (RCV).
What is actual cash value
Actual cash value (ACV) refers to the current market value of an item. To calculate the ACV amount, insurance companies subtract the item’s depreciation (due to age and wear and tear) from its replacement cost. This new amount represents what the item is worth today, not what it would cost to replace it brand new.
For example, let’s say the personal laptop that you bought for $2,000 four years ago gets damaged in a fire. If you have ACV, your insurance company would pay you what the laptop’s market value is today, which may only be $800, due to depreciation.
| EXAMPLE: Damaged Laptop With ACV | |
| Original price | $2,000 |
| Depreciation from wear and tear | $1,200 |
| Actual cash value | $800 |
What is replacement cost value
Replacement cost value (RCV) refers to the full cost to replace an item with a new one at today’s prices. RCV does not factor in depreciation due to age or wear and tear.
Let’s look at the same $2,000 laptop as an example—but this time, let’s pretend you have RCV. Now if the laptop gets damaged in a fire, your insurance company could pay you more than the original price of $2,000 due to inflation. Think about it: a similar make and model probably costs more now than it did four years earlier, right?
| EXAMPLE: Damaged Laptop With RCV | |
| Original price | $2,000 |
| Increased cost of similar item due to inflation | $200 |
| Replacement cost value | $2,200 |
The difference between ACV and RCV
The key difference between ACV and RCV is how depreciation is handled. ACV coverage takes depreciation into account, which usually results in lower payouts. On the other hand, RCV coverage does not factor in depreciation, which usually leads to higher payouts.
Another way they differ is the cost of having actual cash value vs. replacement cost home insurance on your policy. Because ACV offers less coverage, your policy’s annual premium may be lower. Conversely, because RCV offers full coverage, it may cost you a few dollars more, making your premium higher.
These rules hold true whether you have a home, renters or condo policy.
| KEY DIFFERENCES | |
| Actual Cash Value | Replacement Cost Value |
| Pays you what the damaged or stolen item is worth at the time of loss (i.e., its depreciated value) | Pays you to replace the damaged or stolen item with a new, similar item at today’s prices |
| Factors in age and wear and tear | Does not factor in age and wear and tear |
| Usually results in lower payouts | Usually results in higher payouts |
| Lower premium | Higher premium |
Choosing the coverage that’s best for you
So how do you know if actual cash value or replacement cost value is right for you and your home? Choosing between the two usually depends on your financial situation and how much risk you’re willing to assume.
In a nutshell, you’ll need to decide if you prefer more coverage for a higher premium or less coverage for a lower premium. You should always choose the one that is best for your particular situation.
- If you don’t mind paying a slightly higher annual policy premium, then replacement cost coverage may be a better option.
- If you want to keep your home insurance premium as low as possible, then actual cash value coverage may be the better option for you. Just remember that actual cash value will reimburse you based on the depreciated value of your belongings.
Does my home policy provide ACV or RCV
Home insurance policies can include both actual cash value (ACV) and replacement cost value (RCV) coverage, depending on the type of coverage and the item being insured.
Structures on Your Property
Most homeowners insurance policies automatically come with replacement cost value coverage for your primary dwelling and other detached structures on your property. Typically, your dwelling coverage limit is equal to the home’s RCV.
Dwelling coverage, also known as Coverage A, protects against damages to the physical structure of your home. Other Structures coverage, also known as Coverage B, covers structures that aren’t attached to the main house, like a garage or fence.
Your Personal Belongings
Most standard home insurance policies default to actual cash value for damaged or stolen personal property. However, for an added cost, you can purchase replacement cost value coverage.
Personal Property coverage, also known as Coverage C, pays to replace your belongings if they’re damaged or stolen due to a covered event, such as fire and theft.
