Actual Cash Value Vs Replacement Cost

by Dawn Klintworth

When you consider homeowners insurance, you probably think about insurance to protect the structure of your home, known as dwelling coverage. In addition to securing quality home insurance with a reliable insurance company, you also need to understand how depreciation and inflation can affect how your insurance pays when you have a claim. Known as loss settlement options, you will choose either actual cash value or replacement cost coverage.  

Actual cash value 

Actual cash value (ACV) protection subtracts depreciation from the value of your home or belongings. That depreciation is based on time (age of your property) and wear and tear.

Let’s consider two examples:

Actual cash value for personal property

If you bought new furniture for $1,000 two years ago, and it’s damaged today by a covered event, you will be reimbursed for the current cost of equivalent furniture (what you’d pay for it today) minus depreciation. If that depreciated value is $800, the reimbursement would not be what you originally paid for your furniture and likely would not be what you need to buy new furniture today.

Actual cash value for your home (dwelling)

Let’s say you bought a brand-new home eight years ago for $250,000 and insured the structure for $220,000 (you wouldn’t have to insure the value of the land). If that home is damaged or destroyed today, the amount of home insurance protection available to rebuild or repair under ACV is limited. It includes the cost of labor and construction materials, minus depreciation of your home, up to the $220,000 amount you set for your policy. So, if the depreciated value of your home (for time and wear and tear) is $200,000, that is the most ACV coverage would pay. This may not provide you enough money to fix the damage or rebuild your home.

Replacement cost

Replacement cost includes the cost of labor and construction materials, but doesn't subtract for depreciation, so it's based on today's costs. Even though it accounts for inflation, it only covers up to 100% of the coverage amount you set for your policy. While this provides more protection than the ACV option, you have the option to improve your replacement cost coverages by selecting one of these options for your dwelling coverage: 

Extended replacement cost

Extended replacement cost includes the cost of labor and construction materials and extends your protection to up to 120% of the coverage amount you set for your home insurance policy, helping to account for inflation. So, if construction costs have gone up, you have extra coverage to help you rebuild.1

Guaranteed replacement cost

Guaranteed replacement cost, also known as additional replacement cost, includes the cost of labor and construction materials, with no limit, and accounts for inflation. We're one of a few insurance companies to offer this type of coverage that protects you in a high-inflation environment when building and labor costs may be higher than the home insurance protection you’ve set for your home.

Talk with your insurance agent about these coverages since requirements for extended and guaranteed (additional) replacement cost vary by state. Our insurance agents can offer you options so that you select the right home insurance for your situation.

Updated 4-20-23