Actual Cash Value (ACV) vs. Replacement Cost Value (RCV): Which Insurance Valuation Method is Better?

Home insurance policies protect you from loss if your home is damaged or destroyed. These policies cover the structure as well as your belongings. But what if you believe your home and belongings are worth $600,000, and the insurer calculates the total value as $400,000? In case the worst happens, you want to know you can rebuild. 

There's more than just the market value of the home at play, as insurers will often pay the depreciated value of items inside the home rather than the current market value for depreciation. That's where you'll see terms like actual cash value (ACV) and replacement cost value (RCV). Read on to understand ACV vs. RCV and find what to look for in a home insurance policy to protect yourself and your family. 

Actual Cash Value

What is ACV?

In deciding between actual cash value vs. replacement cost value, the first step is to understand what each gives you. Actual cash value is the price of the item or items in total if sold today. It's a type of homeowners insurance policy that covers the depreciated value of the items stolen or damaged.

That means the insurance company isn't concerned about how much it will cost you to replace the items. If the total value of your furniture, office equipment like computers, appliances and other personal belongings was $100,000 when you purchased them, but the insurance company calculates the current value if they're sold today would be $20,000, you'll have to pay the difference for replacement out of pocket. 

You won’t get a check from the insurance company for enough money to replace your damaged, lost or stolen item with a new version. Of course, you can purchase an older or used version equivalent to what you lost, but someone else's old item isn't the same as yours. 

The advantage of ACV is the cost savings. You'll pay less in premiums, which, over the long term, will save you more. And since insurance is probability, there is a chance you'll never need to make a claim. But you should also consider how much you would pay out of pocket if the worst happens and if you can afford to replace damaged items after a covered loss.

How ACV is Calculated

ACV is calculated by determining the cost of replacement of an object and then subtracting depreciation. According to insurance companies' calculations, an object has a certain lifetime, and they calculate depreciation based on its useful lifetime left. The percentage of useful lifetime remaining is multiplied by the replacement cost to calculate the item's actual cash value. Suppose you have a 9-year-old TV that was damaged in a break-in. Insurance companies may calculate that its useful lifetime is finished at 10 years, in which case you'll get just 10% of the replacement cost. 

If you have to file a claim, the insurance company will send an insurance adjuster to determine the cost of your claim. If you selected ACV on your plan, the adjuster will determine the replacement cost with a similar item and subtract depreciation. 

In the example of the TV above, that means that buying a comparable 9-year-old TV might cost $150. You'd get 10% of that, or $15, not nearly enough to purchase a new TV. The insurance company may argue that you needed to replace the TV in a year anyway. But its useful life could have been many more years. 

Pros and Cons of ACV Coverage

The advantages and disadvantages of ACV include lower premium costs but also lower replacement values. Here's how these stack up.

Pros:

• Lower premiums
• Simple coverage for the unlikely event of disaster
• Get a significant portion of your home value from the policy

Cons:

• Much less than the actual costs of replacing your belongings
• Have to pay more out-of-pocket to replace

Replacement Cost Value

What is RCV?

In contrast to ACV, replacement cost value insurance covers the actual cost of replacing something with a brand-new version. RCV doesn't take into account depreciation or age. This type of homeowners insurance covers much more than ACV. In the example of the 9-year-old TV above, you'd get enough cash to buy a new TV of comparable size and brand. 

This feature has major advantages for consumers, as you won't have to worry about missing a payout, and you'll have the cash you need to replace your lost, damaged or stolen personal belongings and the home's contents. RCV will give you a higher insurance payout. But you will pay for this convenience in higher insurance premiums. Should you choose replacement cost value vs. actual cash value? That depends on your financial situation, but the more you know, the more you can make an informed decision. 

How RCV is Calculated

The replacement cost value of a home is calculated by multiplying the square footage of the home by the average cost per square foot in your area. That metric will cover the physical structure. For example, if the home is 2,000 square feet and the average price per square foot in your area is $150, the replacement cost value of the home would be $300,000. 

For the contents of the home, an insurance adjuster will need to visit the property after you file a claim. They will look at the damaged items and standard replacement costs to calculate the final value you receive. 

Pros and Cons of RCV Coverage

The advantages and disadvantages of RCV coverage come down to balancing higher monthly costs with the peace of mind of knowing you can replace everything if needed. Here's what to consider for RCV pros and cons. 

Pros:

• Replacement cost value means you can replace the property and its contents with comparable items.
• You gain peace of mind knowing you don't risk losing significant value in a disaster. 
• You may get a lump sum from your insurer without purchasing new items first.

Cons:

• RCV insurance premiums tend to be significantly higher than ACV premiums, which can lead to higher monthly expenses. 
• You could use the difference in premiums to invest or save, potentially saving more long-term. 
• In some cases, you may have to purchase new items first and prove they’re of comparable value to get full reimbursement.

What to Consider When Choosing Between ACV and RCV

When choosing between ACV vs. RCV, it's important to understand the insurance policy and its coverage. Your financial situation and property type are important factors in deciding which is right for you. 

Type of Insurance Policy Being Purchased or Renewed

First, what is the type of insurance policy you're planning to purchase or renew? Do you know whether it is ACV vs. RCV insurance? Next, consider your financial situation. Do you have the necessary savings or other resources to replace the home's contents in case of a disaster or theft? Your financial situation and goals for the policy will have a major impact on which is best for you.

For example, if you have $500,000 in savings and estimate that it would cost $100,000 to replace the items in your home, you might prefer to pay the lower insurance premium and risk having the additional costs. On the other hand, if you only have $30,000 in savings and estimate that replacement costs would be $100,000, having RCV can protect your peace of mind and offer additional protection. Likewise, if you have many antiques or other high-value items in the home, RCV can make sense. 

Type of Property Insured

The type of property insured can also impact the insurance coverage. If the property has significantly appreciated, for example in an area of exceptional growth, you want to recover the value to purchase a comparable property. 

Choosing ACV vs. RCV insurance

You can find pros and cons on both sides of the RCV vs. ACV debate. The answer is that either RCV vs. ACV insurance is a better choice than no insurance to protect your property. If your priority is the cheapest monthly premiums, ACV will do the job of recouping some percentage of the home value in case of disaster. On the other hand, if your priority is full coverage, RCV may be a better choice. Need other insurance options? Learn more about ACV in car insurance, renters insurance and personal property insurance. 

Frequently Asked Questions