Replacement Cost Versus Actual Cash Value Home Insurance

By Financial Samurai / 09/18/2023

Home insurance costs are going up due to rising home prices, rising building costs, increasing natural disasters, and less appetite for risk from the insurance and reinsurance companies. As a result, more homeowners are looking to save by taking out an actual cash value (ACV) home insurance policy as opposed to the more common replacement cost value (RCV) home insurance policy.

I'm going through this dilemma right now as I diligently hunt for a home insurance policy for a new home I plan to buy. The actual cash value policy I found is about 52% cheaper than the best replacement cost policy I've found. With such significant annual savings, I'm leaning toward the actual cash value option.

Let me explain the definitions of each home insurance policy and discuss why one may be better than the other. Ideally, a homeowner needs disaster insurance in case the worst happens, such as a fire that destroys everything.

First, let's review what depreciation means. It is key to understanding the difference between replacement cost and actual cash value. In simple terms, depreciation is the loss of value of your property over time.

Replacement cost is the amount paid to replace property or personal belongings without any deductions for depreciation. You may also have the option for replacement cost value on automobile, motorcycle, and boat policies.

Actual Cash Value Home Insurance Policy Definition

Actual cash value is equal to the replacement cost value minus depreciation. In other words, an actual cash value home insurance policy does not replace what you lost. Instead, it reimburses you for the item's CURRENT actual value.

For example, your roof might have cost $30,000. However, since it's 15 years old and only has a useful life of 30 years, the current value of your roof might only be $15,000. If your roof tears off during a tornado, your actual cash value home insurance policy would just pay $15,000.

How is the current value of your roof determined? To determine an item's ACV, an insurance adjuster will take the cost of replacing your damaged or stolen property and reduce the cost of the property based on depreciation, such as age and wear and tear.

Therefore, the older your house, the less an actual cash value policy will likely cover.

Replacement Cost Value Home Insurance Policy Definition

Replacement cost value (RCV) is what it costs to replace damaged or stolen property without depreciation. It doesn't matter how old the item is. A replacement cost value policy is obligated to replace the item at whatever it costs today.

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