Cash Value vs Replacement Cost Coverage
Homeowners insurance policies offer actual cash value or replacement cost coverage to replace your damaged, stolen, or destroyed personal property. The only difference between replacement cost and actual cash value (ACV) is a deduction for depreciation. However, both are based on the cost today to replace the damaged property with new property. Let’s take a look at cash value vs replacement cost coverage.
- Replacement cost is what you would pay for the item at today’s cost.
- Actual cash value is what you would pay for a similar item at today’s cost minus depreciation (replacement cost minus depreciation).
- Depreciation is a decrease in value due to wear and tear or age.
For example, your home and furnishings were damaged during a recent wildfire. You made a claim to your insurance company and have met your deductible. Now you are looking at replacing the damaged furnishings. Last year, you bought a couch for your living room for $2,000. The amount of money you will receive to replace your couch depends on the type of coverage you have.
- If you have actual cash value coverage, the company might pay you $1,500 because that is the actual cash value of the couch today (replacement cost minus depreciation).
- If you have replacement cost coverage, the company will pay $2,100 because that is what it would cost to buy a similar couch today.
Note: If you have replacement cost coverage, most insurance companies will give you the actual cash value of an item and require you to submit a receipt for the new item before paying you the remainder.
One popular trend is to offer “actual cash value,” or ACV, coverage on your roof instead of full “replacement cost value,” or RCV. What’s the difference? With ACV, your insurer pays to repair or replace your roof, less your deductible and depreciation for the age and type of roof. With RCV, however, the insurer pays all costs to make your roof whole again without factoring in depreciation, once you’ve met your deductible.
For example, let’s assume your $20,000 roof is 10 years old and your home insurance policy has a $1,000 deductible. If a storm destroys it and you have actual cash value roof coverage that depreciates the roof’s value by $1,000 per year, your out-of-pocket share of the cost for a new roof would be $11,000 (comprised of the $1,000 deductible plus $10,000 for the depreciation). With replacement cost coverage, you’d be out only the $1,000 deductible.