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When you’re choosing the best homeowners insurance policy, you can choose between actual cash value or replacement cost for your personal property coverage.
Personal property coverage insures your possessions, including furniture, electronics, clothes, appliances and other items in your home, up to the policy’s limit. Choosing between actual cash value or replacement cost coverage influences how much your insurer will reimburse if you file a claim and how much you pay for homeowners insurance.
What Is Actual Cash Value?
Actual cash value (ACV) on personal property coverage reimburses you for the value of destroyed or stolen property minus depreciation. Your homeowners insurance policy may have actual cash value coverage for your belongings by default, and you may need to upgrade to replacement cost coverage to get better coverage.
How Is Depreciation Calculated for Actual Cash Value?
Homeowners insurance companies determine depreciation by subtracting how age and typical wear and tear affect an item’s value.
Whether it’s a TV, computer or couch, an item loses value over time. Insurers figure out an item’s life span and calculate depreciation. Let’s say an insurance company decides a $7,000 TV has a 12-year lifespan, and it gets stolen after six years. In that case, it’s lost half of its value based on age.
Home insurance pays out up to the limits on your policy, minus your home insurance deductible. Personal property coverage has coverage limits that are typically between 50% and 70% of your dwelling coverage. If your dwelling coverage is for $300,000 and your personal property coverage is set at 50%, your home insurance policy will cover your personal property up to $150,000.
What Is Replacement Cost Coverage?
Replacement cost coverage pays for the replacement of damaged items so you can buy new, equivalent items. This coverage reimburses you 100% when you replace your items with new, similar items.
The difference between the replacement cost and the actual cash value is called recoverable depreciation. The amount that would be deducted from your claim payment as depreciation if you had actual cash value coverage is paid back to you instead.
Here’s a look at how actual cash value, replacement cost and your home insurance deductible influence how much you would receive for a claim.
Actual Cash Value vs. Replacement Cost
| Type of coverage | Value when you purchased TV | Value after depreciation | Policy deductible | What insurance company may reimburse you for TV |
|---|---|---|---|---|
Actual cash value | $2,000 | $1,000 | $500 | $500 |
Replacement cost | $2,000 | N/A | $500 | $1,500 |
Replacement Cost vs. Actual Cash Value: Key Considerations
To understand what type of coverage is best for your situation, consider cost and your tolerance for risk.
Policy Cost
Replacement cost coverage generally costs more than actual cash value when you get home insurance quotes. You can buy additional personal property coverage if your policy’s limit isn’t enough.
You pay less for actual cash value coverage than replacement cost because you receive less in a claim.
Home Insurance Costs With and Without Replacement Cost Coverage
The average home insurance costs increase by 8% when adding replacement cost coverage to a policy.
| Feature | Cost per year |
|---|---|
Without replacement cost coverage | $1,535 |
With replacement cost coverage | $1,661 |
Average rate increase | 8% |
Source: Quadrant Information Services. Averages are for a standard insurance policy with $350,000 in dwelling coverage.
Costs vary by company. For instance, our analysis found that:
- Erie Insurance increases rates by only 2% on average for replacement cost coverage.
- Progressive has the overall cheapest home insurance policies with replacement cost coverage ($743). Progressive’s average is less than half of the overall average cost of 12 insurers analyzed.
Adding replacement cost coverage isn’t a huge cost increase, but going with actual cash value may be a better option if getting the cheapest home insurance is paramount. Remember that you will get less from your insurance company if you file a personal property claim down the road.
Tolerance for Risk
Replacement cost coverage may be a better option if you don’t want to pay out of your own pocket to buy new items if you have an insurance claim. Replacement cost coverage should give you enough to replace those times rather than a percentage of the items’ value.
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Actual Cash Value vs. Replacement Cost FAQ
What is extended replacement cost coverage?
Extended replacement cost provides insurance beyond your dwelling coverage limit by adding a percentage, such as 20%. Here’s an example: Say you have $300,000 dwelling coverage plus 20% extended replacement cost. In that case, you could get up to $360,000 to rebuild your home.
Extended replacement cost coverage helps offset inflation and local labor and material costs. This coverage may be especially helpful if you need to rebuild your home after a major storm that creates widespread damage, which causes local building costs to skyrocket.
What is guaranteed replacement cost coverage?
Guaranteed replacement cost coverage pays any cost to rebuild your home.
Without guaranteed replacement cost coverage, you may have to dip into your savings to pay for rebuilding if your dwelling coverage amount hasn’t kept up with building costs and inflation. Not all home insurance companies offer guaranteed replacement cost coverage, but Erie, Farmers and Nationwide do.
What is modified replacement cost value coverage?
A home insurance policy with modified cost value coverage is for older homes and pays for repairs using today’s standard building materials and construction. That means a policy doesn’t provide funding to repair and replace items found in older homes, which may cost more than current construction.
Homeowners insurance companies differ in how they insure older homes. Some insurers provide replacement cost coverage for older homes in good shape, while other insurers may not provide coverage for older homes.
