Actual Cash Value vs. Replacement Cost—What to Know

by Paul Konrardy

Actual Cash Value vs. Replacement Cost—What to Know

When you’re purchasing an insurance policy for your home and possessions, odds are that you’ll be faced with questions about coverage types.

  • Will your home automatically fall under replacement coverage?
  • What about your possessions: do you choose actual cash value or replacement cost and are those your only two options?
  • And what about your expensive artwork—how should that be insured?

We did some digging for answers and pulled together useful advice from industry experts to help you with the decision-making process. (As always, consult with your insurance advisor for advice specific to your situation and needs.

What’s the difference between actual cash value and replacement cost?

International Risk Management Institute, Inc. (IRMI) provides the following explanations of these two terms and how they are calculated.

  • Actual Cash Value (ACV) can be calculated one of three ways: what it costs to repair or replace the damaged property (home or possessions) less depreciation, what the property’s “fair market value” is, or what the value of the property is, taking into account all relevant evidence (also known as using the “broad evidence rule”).
  • Replacement cost refers to what it would cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation.

Regardless of which type of coverage you have, the value of the damaged property is based on what it would cost today to replace it.

Keep in mind that, in certain instances, you may not be able to insure your home for replacement cost, notes the Insurance Information Institute (III). Older homes, for example, may have to be covered under a modified replacement cost policy, meaning those original plaster walls and hardwood floors will be replaced using standard building materials and construction techniques.

Or you might opt to not pay the higher premium for a very large older home and instead choose a policy with limits high enough to provide you with a home that meets your size and quality preferences. (Again, discuss this with your insurance agent.)

WHN TIP – Save the Receipts! If you need to file a claim, having the receipts will make the process easier since it provides a back-up for the inventory. “As a general rule of thumb: If it cost you more than you can afford to lose — keep the receipt,” says Frankenmuth Insurance.

What is guaranteed replacement cost coverage?

According to ValuePenguin, this type of homeowners policy takes replacement cost coverage to another level. It covers the cost of rebuilding your home to exactly what it was before the event, even if the cost exceeds the estimated value of the home. While it is more costly, it also provides protection against sudden increases in material or construction costs, such as when many claims are made in an area after a disaster.

Some insurance companies offer an alternative, called the extended replacement option, which covers an additional 20% to 25% of the replacement value of the home.

How can you decide which one to choose?

Before you can determine which type of coverage you want for your personal possessions—actual cash value or replacement—you need to know what you own, what each item cost, and what those items would cost in today’s dollars.

While cash value coverage costs less, notes the III, you should consider what it would cost if your home was destroyed and you had to replace all the items inside. Paying the slightly higher premium is generally a worthwhile investment in the long run, says III. (Live in a flood-prone area? Flood insurance only provides actual cash value coverage on belongings, according to III.)

WHN TIP – Inventory, Inventory, Inventory: If you haven’t recently updated your household inventory (or haven’t done one at all), do it ASAP! You never know when a disaster (natural or manmade) can strike! (Need help? Our Sample Home Inventory Lists: Helpful Reminders can get you through the process!)

Do my valuables need to be appraised to be covered?

If you have jewelry, artwork, antiques or valuable collectibles, they are already covered for losses caused by all the perils included in your policy, according to III. However, given that standard policies generally have a low limit of liability, you may want to increase your coverage, either by raising the limit of the liability or purchasing a floater policy and “scheduling” your individual valuables.

If you choose the latter, you will need to have the items professionally appraised by qualified appraisers, certified by The American Society of Appraisers, The Appraisers Association of America or the International Society of Appraisers. Then keep all related documents together: a copy of the bill of sale, appraisal, provenance (history of past ownership) and photographs, says III.

WHN TIP – Get An App: If you’re looking for an app to track your home inventory, check these sites for recommendations: The 7 Best Home Inventory Apps of 2019 and The Best Home Inventory Apps.

For More Information

LendEDU—Actual Cash Value vs. Replacement Cost for Homeowners Insurance
LendEDU is a website that helps consumers learn about and compare financial products, including student loans, personal loans, credit cards, insurance products, banking products, and more. Our goal is to help you make confident decisions.

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