Actual Cash Value vs Replacement Cost Coverage

Let’s break down all the details of actual cash value and replacement cost coverage so you know how much your homeowners, renters, condo or landlord insurance company will reimburse you.

Actual cash value is defined as the depreciated value of your personal property at the time the damage or loss occurred. If you have actual cash value coverage for your personal property as part of your home insurance, your insurer subtracts depreciation when reimbursing you for lost, damaged or stolen items.

The ways insurance carriers calculate depreciation varies by company. But, generally, the older an item is, the less money you’ll receive for it.

As you can imagine, with the depreciation deduction, actual cash value doesn’t provide enough compensation on its own to replace a damaged item. Instead, the main advantage of actual cash value (ACV) coverage is its cost. 

ACV coverage is usually cheaper than the alternative way to financially protect your property, replacement cost. Since it pays you less for your items, actual cash value costs less to cover you.

“ACV insurance” usually isn’t a type of insurance policy on its own. It usually just describes the coverage you have in one of your home insurance. ACV coverage is common in personal property protection in home insurance. 

Just as a side note, you should never insure your home itself for its actual cash value if you can help it. This could leave you significantly shortchanged if you need to rebuild your house entirely in a worst-case scenario.

Let’s take a look at a potential actual cash value formula as it relates to personal property. As an example, imagine your personal computer was valued at $2,000 and got damaged in a house fire. You filed a claim with your insurance company to replace it.

Using actual cash value, your insurance company will determine how much money to award you by subtracting depreciation from what you paid for the item. Depreciation is the original cost of the item minus the percentage of its lifespan you’ve used.

In this example, let’s say your computer was 2 years old, and your insurance company believes the computer has a lifespan of 10 years. To calculate depreciation, your provider could multiply the initial cost of the item by the percentage of the lifespan that it’s been used, which would look like: $2,000 x (0.2) = $400

This is how much your computer has depreciated so far. You can then subtract the depreciation from the amount you paid to determine your payout: $2,000 – $400 = $1,600

Since your computer wasn’t brand new, you receive less than what it costs to get a new, similar one with actual cash value.

For personal property, replacement cost value pays claims based on the full amount of money required to replace the damaged, lost or stolen items.

While this is a more superior and straightforward option in terms of reimbursement from your insurance company, it may also require a bit of effort on your part to ensure the full value is received.

If your item had any customizable parts or upgrades done to it, you may be required to show proof of purchase to have those upgrades or modifications covered by your insurance claim. 

Also, having replacement cost coverage in a policy is typically more expensive than having actual cash value coverage. The difference varies by insurer, so make sure to ask if you’re wondering. When getting a quote online, you may be able to see the difference in your potential rate in real-time with either option.

The formula for replacement cost is quite simple. Your insurance company should reimburse you what your item cost, either with an item of similar quality, or the exact same one that you had before.

So, if you paid $2,000 for your computer two years ago, it doesn’t matter how far the computer is into its lifespan. You should receive $2,000 to replace it.

If the item costs more now than what you paid for it, you may be awarded this difference as long as it doesn’t exceed your policy limits. Certain items that can gain value over time, like art or jewelry, are typically subject to specific limits. To be certain that you’re covered for the full value of these items, you may want to look into scheduled personal property coverage.

If you’ve got actual cash value, you may want to consider changing policies or adding additional insurance coverage to help cover the gap between the amount of money you’d be issued in a claim and the amount of money it would cost to replace your possessions. It may be well worth it.

If you have replacement cost coverage, your provider may initially pay the item’s actual cash value and then issue a follow-up payment after you’ve provided proof of purchase for the item.

It helps to have a home inventory list. Keeping track of what you have and what you paid for your belongings will make it easier for your insurer to replace your items when the time comes. If you don’t have receipts for everything, you or your provider could look up what similar items typically cost online as a basis for reimbursement.