Replacement Cost vs. Actual Cash Value
One of the most important decisions in home insurance is whether to insure your home and belongings for replacement cost or actual cash value. Here's the difference and why it matters.
What Is Actual Cash Value (ACV)?
Actual cash value is the replacement cost of an item minus depreciation. If your 10-year-old roof is damaged, an ACV policy pays what that roof is worth today — not what it costs to replace it. ACV policies have lower premiums but pay out less at claim time.
What Is Replacement Cost Value (RCV)?
Replacement cost value pays what it actually costs to repair or replace your home or belongings with new materials of similar kind and quality — without deducting for depreciation. If your 10-year-old roof is destroyed, an RCV policy pays for a brand new roof.
Which Is Better for Your Home?
For your home's structure (dwelling coverage), replacement cost is almost always the better choice. The difference in premium is usually modest, but the difference in claim payout can be enormous. Most mortgage lenders require replacement cost coverage.
Which Is Better for Personal Property?
For personal property, replacement cost coverage is also generally worth the extra premium. Without it, a 5-year-old TV that costs $800 to replace might only pay out $200 after depreciation. With replacement cost, you'd receive the full $800.
Extended Replacement Cost
Some policies offer extended replacement cost coverage, which pays 20–50% above your policy limit if rebuilding costs exceed your coverage amount. This protects against construction cost increases and is worth considering in areas where building costs are rising.
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