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What's the Difference Between Homeowners Insurance Replacement Cost and Actual Cash Value?

Published: January 2018

Replacement cost and actual cash value refer to how your homeowners insurance policy reimburses you for property damage after a covered loss. While both types of coverage help with the costs of rebuilding your home or replacing damaged items after a covered loss, actual cash value policies are based on the items' depreciated value while replacement cost coverage does not account for depreciation.

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What is Actual Cash Value Coverage?

A homeowners insurance policy with actual cash value coverage typically determines value by taking the cost to replace your personal belongings and reducing that amount due to depreciation from factors such as age or wear and tear, says the Information Information Institute (III).

Personal property coverage helps pay to repair or replace your personal belongings if they are stolen or damaged by a covered peril, such as fire. A policy that provides actual cash value coverage typically reimburses you for the depreciated value of an item. For example, if a damages your TV, a policy with actual cash value coverage would reimburse you for its depreciated value, which may be less than it will cost to purchase a new one.

What is Replacement Cost Coverage?

A replacement cost policy helps pay to repair or replace damaged property without deducting for depreciation, says the III. This type of coverage may be available for both your personal belongings and your home if they are damage by a covered peril.

Personal Property Coverage. If you have replacement cost coverage for your personal property, your insurance will typically help cover the cost of buying a new item at today's price. For example, if your TV is stolen, replacement cost coverage will likely reimburse you enough to purchase a new one of similar model and quality. It is a good idea to keep an inventory of your personal belongings and estimate what it would cost to replace them, says the III.

Dwelling Coverage. Most homeowners insurance policies come with replacement cost coverage for the structure of your home. This type of coverage typically helps pay to repair or rebuild your home using materials of a similar quality, says the III. It generally does not take into account depreciation of your home due to factors such as age. For example, if your kitchen is damaged in a fire, replacement cost coverage may help pay to replace your cabinets using materials of a similar quality, whether they were 15 years old or brand new.

While you can get replacement coverage for most properties, says the III, you may need modified replacement cost coverage if you have an older home. This type of policy may cover the cost of rebuilding features of an older home, such as plaster walls, with alternative materials more commonly used today.

It's important to be aware of how much it would cost to rebuild your home if necessary and keep your insurance agent updated on any upgrades you have made to the property, says the III. You may need to update the limits of your policy to keep up with your needs or with building costs in your area.

Deductibles and Limits

Regardless of what type of coverage you have, keep in mind you may also have to pay a deductible before your insurance coverage kicks in after a covered loss. Also, both types of coverage are subject to limits, which is the maximum amount your policy will pay toward a covered loss. Review your policy to be sure you understand which type of coverage your policy provides as well as the amount of your deductible and coverage limits. Your agent can help you make changes to fit your needs.

Have more questions? A local agent can provide more information about replacement cost coverage and actual cash value coverage so you can choose the protections that are right for you.

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This content is for informational purposes only and may not be applicable to all situations.

Coverage subject to terms, conditions, and availability. Policy issuance is subject to qualifications. Allstate Insurance Company, Allstate Indemnity Company, Allstate Fire and Casualty Insurance Company, Allstate Property and Casualty Insurance Company, Northbrook, IL. © 2019 Allstate Insurance Company, Northbrook, IL.
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