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Actual Cash Value versus Replacement Cost

Sep 2019

Understand the Difference between Actual Cash Value and Replacement Cost

Disaster can strike at any time. Heaven forbid your house is destroyed in a fire, flood, or tornado. But if the worst should happen, you’ll feel better if you’ve taken the time to understand the difference between actual cash value and replacement cost. Talking to your insurance agent about this difference and then making choices that fit your situation can save you a world of frustration along with lots of your hard-earned money.

Actual Cash Value (ACV)

If your policy is set up to recognize ACV (actual cash value), the most you can expect to recover for lost property is the replacement value, minus depreciation. The depreciated value is determined by a formula that considers the natural life span of property and its relative value as it drops over time.

Think of the value of a refrigerator on the day you buy it. Could you sell it for that much six or seven years later? Most likely you’ll find that the value of the refrigerator has depreciated, and you’ll end up selling it for less than you paid for it.

Your home and most of its contents – such as your roof, computer, or furniture – may lose value over time due to age and wear and tear. In general, the calculation of ACV begins by taking the replacement value of the item (what the item would cost today) and multiplying it by the depreciation rate (based on the age of the item). That number is then subtracted from the replacement cost to arrive at cash value.

From a legal standpoint, the courts have interpreted the insurance industry’s reference to ACV to mean "fair market value" and have upheld the traditional definition to mean “the cost to replace with new property less the amount of depreciation”.

Your belongings are covered by “personal property” coverage on your policy. Most insurance policies default to ACV, but you can usually upgrade your policy to recognize replacement cost valuation for an increased premium charge.

Replacement Cost Value (RCV)

Unlike ACV, replacement cost valuation (RCV) pays for the full replacement cost of your damaged possessions in the event they are destroyed in a natural disaster or theft. RCV fits more closely with the real objective of insurance: to manage and transfer risk. The goal of insurance is not to provide a profit for the insured, but rather to provide a means to compensate policy holders for valuables, automobiles, or homes that were lost or damaged.

For example, a 3-year-old laptop computer was originally purchased for $500. If it is destroyed in a covered incident, replacement cost coverage with your homeowner's policy would ensure you are reimbursed enough to pay for a new, comparable laptop of $500 value. Replacement cost is simply the cost to replace your belongings based on the price it would take to purchase it new in today’s market.

ACV policies are typically less expensive than RCV policies. The reason is simple: ACV policies offer less repayment when a claim is made. Remember that depreciation is the key driver with ACV claims.

Which option is best?

It is recommended that you speak with an experienced insurance professional for guidance on which option is best for your situation. ACV insurance is usually the least expensive option. However, ACV may not offer enough coverage or compensation if something is damaged or stolen. The amount you will receive from your insurer will likely be higher with a RCV policy.

If you have any questions regarding ACV or RCV and which type of policy would best cover your valuables, call PolicyPro today. Our representatives can guide you as you make your important insurance decisions, and our RateFinder™ can quickly give you the lowest premium estimate from over 40 A-rated insurance companies. Visit to see for yourself.

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