You come home after a long day to discover shattered glass, ransacked rooms and missing items. Your heart sinks as you realize how much of your stuff was stolen. Thankfully, you have homeowners insurance.
But will the insurance company actually pay enough to replace all your stuff? The answer depends on whether you have actual cash value or replacement cost coverage.
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Answer a few questions to see custom quotes and find the right policy for you. What is actual cash value coverage?
Actual cash value (ACV) coverage calculates your claim payout based on an item's replacement cost, minus depreciation. Depreciation is the loss of an item’s value over time due to wear and tear. This means the payout you receive may be less than what it costs to replace that item with a brand-new one. ACV is a common payout method for personal property coverage.
Say someone steals your 2-year-old laptop, and you have ACV coverage. The insurance company determines that it would cost $2,000 to buy a new computer of similar quality. That’s the replacement cost.
Assuming the laptop has a five-year lifespan, the insurer subtracts 20%, or $400, per year for depreciation. This leaves you with an actual cash value of $1,200 for your 2-year-old computer. That’s how much your insurance company would pay, minus your deductible. Your deductible is the part of a home insurance claim you’re responsible for paying.
If you have a $500 deductible, you'd receive a final payout of $700.
What is replacement cost coverage?
Replacement cost coverage allows you to replace damaged or stolen property with similar new items. It doesn't consider depreciation, so you receive the full cost to replace the item regardless of its age or condition.
Let’s go back to the example with the 2-year-old laptop. With replacement cost coverage, the insurance company would pay the price of a similar new computer, minus your $500 deductible.
Here’s how the two payment methods compare:
| Actual cash value | Replacement cost | |
|---|---|---|
| Cost of new laptop | $2,000 | $2,000 |
| Minus depreciation | $800 ($400 x 2 years) | $0 |
| Minus deductible | $500 | $500 |
| Final claim payout | $700 | $1,500 |
To get the full amount, you usually have to prove you’ve actually replaced the item. So first you’d get one check for the actual cash value of your laptop, minus your deductible. In our example, that first check would be $700. Then you’d buy your new laptop and send the receipt to your insurer. The company would send you a second check that covers the difference ($800 in the example above).
Did you know...
This second amount is often called “recoverable depreciation.” Actual cash value vs. replacement cost
Replacement cost coverage may pay significantly more than ACV for damaged property. The difference may not matter much for a single damaged item, but imagine having to replace all your belongings after a house fire. ACV coverage could leave you far short of the amount you need to fully recover.
Because it’s more comprehensive, replacement cost coverage usually costs more than ACV coverage. But the extra expense might be worth it in case of a major loss.
To see the cost difference, NerdWallet got home insurance quotes for houses of different sizes in three ZIP codes. We found that you’d pay anywhere from $260 to $2,200 more per year for replacement cost coverage on your personal belongings. Your own price difference will depend on where you live and how much coverage you need.
You might come across both ACV and replacement cost coverage in your home insurance policy. The structure of your home is typically covered on a replacement cost basis. For personal belongings like electronics, furniture or clothes, the insurance company often offers ACV coverage by default.
Buyer beware...
Some insurers cover older roofs on an actual cash value basis, even if the rest of your house has replacement cost coverage. This could lead to an unpleasant surprise if you’re expecting your insurer to pay for a whole new roof and instead you get only a few thousand dollars. Learn more about homeowners insurance and roofs.
Types of replacement cost coverage
By default, replacement cost coverage pays to rebuild, repair or replace your property, up to your policy’s limit. But what if you need more money than your policy allows? These options can give you more coverage for the structure of your home.
Extended replacement cost coverage
Extended replacement cost coverage is an optional add-on to your home insurance policy. It typically offers 10% to 50% above your dwelling coverage limit in case rebuilding costs are higher than expected.
Suppose your home is insured for $300,000 with a standard replacement cost policy. Your home is destroyed in a wildfire, and it costs $375,000 to rebuild because local building costs have skyrocketed. Your insurance company would pay up to the $300,000 policy limit. You'd be responsible for the remaining $75,000.
But if you had 20% of extended replacement cost coverage, the insurance company would pay an extra $60,000 to rebuild, for a total of $360,000. You’d have to cover only $15,000 instead of $75,000.
Guaranteed replacement cost coverage
With guaranteed replacement cost coverage, your insurance company pays the full cost to rebuild your home, no matter how much it is. In the example above, your insurance company would pay the full $375,000 to rebuild your home. You wouldn't pay any out-of-pocket expenses other than your deductible.
Here’s how the three types of replacement cost coverage compare:
| Replacement cost | Extended replacement cost (20%) | Guaranteed replacement cost | |
|---|---|---|---|
| Cost to rebuild | $375,000 | $375,000 | $375,000 |
| How much your policy pays | $300,000 | $360,000 | $375,000 minus your deductible |
| How much you pay | $75,000 | $15,000 | Your deductible |
Replacement cost vs. actual cash value: How to decide
Considering these factors can help you decide whether actual cash value or replacement cost coverage is best for you:
Budget. If you want to save money on insurance, actual cash value coverage is usually cheaper. However, you may not get enough to buy new replacements for the belongings you lost. Say the price difference is $300 a year, but in a claim, the difference could be worth thousands. You’ll want to weigh the premium savings year after year against the risk of a big claim.
The age of your belongings. If you have a lot of older items that have lost value over time, you might benefit from replacement cost coverage. Without it, you won’t get much in an insurance claim due to depreciation.
The value of your belongings. You might be someone who wouldn’t mind shopping at thrift stores for used items or simply not replacing everything you lost. If that sounds like you, ACV might provide enough coverage to meet your needs.
Risk tolerance. If you want more financial protection and are willing to pay extra for it, replacement cost coverage could save you thousands in a large claim.
To find out if you have actual cash value coverage or replacement cost coverage, check your policy or call your agent.
Due to an editing error, a previous version of this article offered an incorrect explanation of how actual cash value is calculated. It also incorrectly stated how much an extended replacement coverage policy would pay. The article has been corrected.
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