Understanding actual cash value vs. replacement cash value

Insuring what is likely your biggest asset – your home – is important. But just as important is understanding the coverage you’re paying for. For this, there are two phrases you need to familiarize yourself with: replacement cost value (RCV) vs actual cash value (ACV).

• Replacement cost value is the amount it would cost to replace or repair your home and belongings at current prices, without subtracting for age, condition, or depreciation.
• Actual cash value is the replacement cost minus depreciation. In other words, replacement cost takes age and use into account, so you typically get less.

Understanding which type of coverage you have has a big effect on your homeowners insurance premiums now but, perhaps more importantly, it affects how much you’ll receive if tragedy strikes. Let’s dive into the specifics of actual cash value vs. replacement cost value so you can make an informed decision that works for your situation.

What is actual cash value?

The essential thing to understand about actual cash value is that it goes down over time. In short, your home and your belongings, for purposes of reimbursement, are valued at what they are worth at the time of loss, not what you paid for them or what it would cost to replace them.

This means that if you suffer a loss, insurers will determine how much it costs to replace the item, then factor in the expected life remaining to determine your reimbursement.

Insurers offer these policies, and homeowners buy them, because an ACV policy’s premium cost is lower. This makes homeowners insurance more affordable, at the risk of higher out-of-pocket costs if tragedy strikes.

How does ACV work?

When you file a claim under an ACV policy, your insurance company first calculates the replacement cost of the damaged or destroyed property. Then they factor in depreciation due to age, condition, and remaining useful life. They may require a description of the items in your claim, with receipts or proofs of purchase.

There’s a simple formula to determine actual cash value.

ACV = Replacement Cost × Useful Life Remaining

Usually, you’ll get a payout that won’t allow you to replace the item without some out-of-pocket expenses. That means you might have to dig into your savings or buy a less-expensive product than you had before.

As far as when you’ll get paid, different states have different laws. But in general, once your claim is accepted, you should get paid quickly, within a few days or weeks.

Example of ACV

Let’s look at a practical example of an ACV claim.

Say you installed a new roof with a 25-year expected lifespan for $15,000. After 10 years, it’s damaged in a covered disaster and needs replacing. Your insurance would first calculate how much it would cost to replace your roof. Then, the adjuster would calculate that it had 15 years of useful life remaining and factor in depreciation.

Finally, they would reduce your reimbursement by the amount they calculate the 10 years of depreciation is worth, plus your deductible (let’s assume it’s $1,000). In other words, you’re reimbursed for roof life you had left, not what you paid for it or what it will cost to replace it.

So, now let’s say a new roof, because of inflation, is $20,000. Your roof had 15 years of life left in it, or 60%. So, you would receive $12,000, minus your $1,000 deductible, to replace the roof: $7,000.

If you want to replace your roof with a similar one to the one you lost, you would be on the hook for $13,000 of its replacement cost.

What is replacement cost value?

Replacement cost value is just what it sounds like: It’s the amount that it would cost to rebuild your home or any property lost with brand-new items of similar kind and quality. Here, there is no depreciation factored in.

Insurers calculate the replacement cost by researching the current market cost of the materials and labor it will take to replace items or rebuild your home.

Obviously, this means a bigger payout. For that higher level of protection, you’ll typically pay higher premiums. Most standard homeowners insurance policies include RCV for your home’s structure coverage, but ACV policy terms for your personal property unless you upgrade it.

How does RCV work?

If you have an RCV insurance policy and file a claim, your insurer calculates the replacement cost at current prices, without factoring in age, condition, or depreciation. So, you’ll receive enough of a payout, minus your deductible, to replace your loss with a new item.

Homeowners insurance policies usually include RCV policies for structure coverage. But your personal property might only have an ACV policy, unless you upgrade it.

The timeline for your payout varies from insurer to insurer, but generally, RCV payouts come in one of a few ways. Some insurers pay the replacement amount they calculate to you soon after your claim is approved. Others pay you a certain amount, then reimburse you the difference between that amount and the actual amount you had to spend after you replaced the item and sent them a receipt. Still others reimburse you only after you have replaced the item.

Example of RCV

Let’s look at our roof example again and see how it would work if it was covered under an RCV policy.

You installed your roof for $15,000 10 years ago. It gets destroyed by a covered event and you file a claim. To replace the roof with one of similar quality at current prices is $20,000. You have a $1,000 deductible. Your insurer would pay you $19,000 for your claim. You would need to cover the $1,000 deductible out-of-pocket when replacing your roof.

ACV vs. RCV: At a glance

There are some key differences when comparing replacement cost vs. actual cash value policies. The main difference comes down to this:

An ACV gives you less money upon reimbursement for a claim because it factors in depreciation. So, you might have substantial out-of-pocket costs to replace property. However, your premium costs will be lower.

RCV, on the other hand, gives you more protection, but for higher premium costs. You’ll receive enough money to fully replace your property at similar quality, minus any deductible. But in the meantime, you’ll pay higher insurance premiums.

Most homeowners insurance policies include RCV for your home’s structure, but ACV for personal property. But you can often upgrade, for a higher cost, to an RCV policy.

Here’s a quick comparison of the two:

Cost comparison between ACV and RCV

The decision between ACV and RCV coverage is a big one. While RCV offers the comfort of knowing your home and possessions will be fully replaced with little out-of-pocket expense, it comes with higher premiums. ACV, on the other hand, is more affordable now, but if disaster strikes, all that savings might be wiped out.

Adding to the complexity is the fact that, because of recent massive payouts for natural disasters, insurance premiums are expected to rise by 8% throughout 2025. The higher cost of replacement – particularly the cost of lumber and other supplies – has shrunk the insurance companies’ profits.

Premiums may also vary by region, the age of a property, and the insurer. But you can expect RCV policies to cost more than ACV policies, depending on coverage limits.

Here’s a simple breakdown using our roof example. Remember, our destroyed roof was installed 15 years ago, and a new, 25-year roof will cost $20,000 today. Your policy has a $1,000 deductible.

Questions to ask when choosing between ACV and RCV

Here are some questions to consider when choosing between an ACV or an RCV.

What does the insurance provider offer?

Different insurance companies structure their policies differently. While it’s common for policies to include RCV coverage for your home’s structure and ACV for your personal property, unless you upgrade it, policy terms can vary.

Make sure you review your policy terms carefully and ask your insurance agent about riders or endorsements that affect your coverage. You should also compare your policy to different policies regularly to ensure your coverage remains the best fit for you.

What does your mortgage require?

Most mortgage lenders require homeowners insurance. For instance, all government-backed mortgages – Federal Housing Administration, Veterans Affairs and U.S. Department of Agriculture – require proof of homeowners insurance policies before closing.

This insurance protects them from loss, but it also protects you. It ensures that in the event of catastrophic loss, your home can be rebuilt.

Don’t confuse homeowners insurance with private mortgage insurance (PMI). That is a different insurance that is only needed on certain loans, generally when your down payment is less than 20%. It protects the lender from you defaulting on your loan.

What is the climate like where I live?

Climate change has altered the homeowners insurance market in a significant way. With severe weather events more frequent, more intense, and therefore more costly – NOAA reported that the U.S. experienced more than $1 billion of losses last year, not accounting for loss of life – insurance premiums have increased.

In fact, several insurers announced limits on California homeowners insurance policies due to wildfire risks.

Which is better: ACV or RCV?

Which policy is better for you depends on your personal situation, including your location, the age of your home and personal property, and your tolerance for risk.

An RCV may be better if:

• You’re a new homeowner who wants full protection.
• You own high-value items or live in an area prone to severe weather and devastating natural disasters.
• You want peace of mind knowing that if disaster does strike, you’ll be able to rebuild with minimum out-of-pocket costs.

An ACV may be better if:

• Your home is older and you’re comfortable with basic protection and more risk.
• You’re on a tight budget and need more affordable premiums.
• You have enough savings to cover the out-of-pocket expenses that you’ll incur with a loss.

The bottom line: Picking an ACV or RCV depends on your needs

Homeowners insurance is not a one-size-fits-all thing. Getting the right policy for you means fully understanding what different policies offer, your location and the risk of severe weather, the age and condition of your home and property, and your risk tolerance.

In general, your premiums will be less with an ACV for less protection and higher out-of-pocket expenses for any loss. You’ll pay higher premiums for an RCV, but enjoy full replacement protection, less any deductible.

Finally, remember that policies at various insurers change, so always stay up to date to get the coverage you need at a price you can afford. A great place to check routinely is the Rocket Learning Center.