When it comes to repairing or replacing your property, homeowners insurance policies can include actual cash value coverage or replacement cost value coverage. Insurance companies use your coverage type to calculate how much to pay you for property damage or loss.
In this article, we’ll answer questions about how these coverage work, including:
- What Is Actual Cash Value (ACV) Coverage?
- What Is Replacement Cost Value (RCV) Coverage?
- What Is the Difference Between ACV and RCV Coverage?
- Do I Have ACV or RCV Coverage?
- What Is Extended Replacement Cost Coverage?
This article was updated in October 2023 and I review it annually.
What Is Actual Cash Value (ACV) Coverage?
Over time, the value of your belongings decreases because of wear and tear or aging. Actual cash value (ACV) coverage factors in depreciation as part of the calculation of how much your insurer will pay to repair or replace your property. That means your insurance will pay up to the value of your property at the time of damage or loss instead of its value when you purchased it.
Let’s consider a laptop. If it’s two years old, you won’t be able to sell it for what you paid to buy it new. Even in excellent condition, regular wear and tear and the age of the technology drive down the laptop’s value.
With ACV coverage, your insurer pays based on the depreciated value. Imagine someone steals the laptop. Maybe you paid $1,000 for it, but it was worth only $600 at the time of the theft. Your insurer would compensate you up to $600, minus any unmet deductible.
What Is Replacement Cost Value (RCV) Coverage?
Replacement cost value (RCV) coverage helps you replace your property with the same or similar quality items. With RCV coverage, your insurer will look at how much you originally paid for something and consider how much it would cost to repair or replace it with the same or similar items at today’s prices.
So — if you have RCV coverage — your insurer will reimburse you the cost to replace your items, as long as that amount doesn’t exceed your coverage limit.
Let’s consider the laptop again. With RCV coverage, your insurer will pay for you to purchase the same laptop or one of similar quality. So if you paid $1,000 for the laptop, your insurer would compensate you up to $1,000 to purchase a replacement.
Some insurers offer adjustments for inflation as part of RCV coverage. If replacing the laptop with a similar quality laptop would cost you $1,200 at today’s prices, you could qualify for up to $1,200 in compensation.
What Is the Difference Between ACV and RCV Coverage?
Insurance companies use ACV and RCV to determine how much to pay you for damages or loss to property after a covered event. RCV looks at how much it would cost to replace your property with the same or similar quality items. ACV looks at how much your property was worth at the time of any damages or loss by factoring in depreciation.
You can think of actual cash value as the replacement cost value minus any depreciation.
when calculating compensation for damages or loss to your property | value when calculating compensation for damages or loss to your property |
of your property at the time of damages or loss | items of the same or similar quality as when your property was first purchased |
- $400 (Depreciation factored in) $600* (total compensation) | - $0 (No depreciation factored in) $1,000* (total compensation) |
* Any unmet deductible would also be subtracted to determine the total compensation. |
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Because of depreciation, the actual cash value of property is often less than the replacement cost value.
While you can expect to pay lower premiums on a policy with ACV coverage, you should also expect higher out-of-pocket costs in the event of damages or loss to your property. Policies with RCV coverage carry higher premiums but will also provide more financial protection.
Do I Have ACV or RCV Coverage?
It’s typical for standard homeowners insurance policies (HO-3s) to include RCV coverage for your dwelling and ACV coverage as the default for personal property. If you have a standard policy, your insurer may offer the option to upgrade to RCV coverage for your personal property, but this upgrade will increase your premiums.
Comprehensive homeowners (HO-5s) insurance policies typically include RCV coverage for your dwelling and personal property.
If you’re unsure whether you have ACV or RCV coverage, you can check your policy’s declarations page. The declarations page has a summary of your policy, including:
- who’s insured
- your coverage limits for each type of protection
- the amounts of your deductibles and premium
You’ll also likely find designations of ACV or RCV coverages. Many insurance companies provide access to your policy documents and declarations page through their company websites and apps.
What Is Extended Replacement Cost Coverage?
Along with ACV or RCV coverage, the amount you’re reimbursed for a claim depends on your coverage limit. Extended replacement cost coverage is an endorsement that applies to RCV coverage and can kick in to increase your coverage limit if a covered peril causes damages or loss exceeding your policy’s existing limits.
Let’s consider a home that has a dwelling coverage limit of $250,000. If damages to the home exceed $250,00 for repair, an extended replacement cost endorsement would kick in to increase reimbursement on a filed claim. So, with a 10% extended replacement cost coverage endorsement, you could qualify for up to $275,000 to repair your dwelling.
The amount of extended coverage you can purchase varies depending on the insurer, and not all insurers offer extended replacement cost coverage. Also, insurers that offer this endorsement may have qualification requirements. And you still need to meet your policy deductible(s) first.
Final Thoughts
In the event of property damage or loss, your insurer will decide how much to compensate you based on whether your insurance policy has ACV or RCV coverage.
A policy with ACV coverage will cost you less in premiums, but it could cost you more in the long run if you have to repair or replace your property. ACV coverage compensates you only up to your property’s replacement value minus depreciation.
RCV coverage will result in higher premiums, but does a better job of making sure that you come out financially where you started after something unexpected happens. With RCV, you get compensation to replace your property with the same or similar items, within your policy’s limits.
To determine which coverage better meets your needs, you should assess the value of your property, how much savings you have and how much you’re looking to spend on homeowners insurance.
Also remember: Your deductible and coverage limits impact your total reimbursement amount for any claims.
