What’s the Difference Between Actual Cash Value Coverage and Replacement Cost Coverage?
Insurance policies have different levels of coverage, so your out-of-pocket expenses will vary when you file a claim with your homeowners insurance policy. That’s why it’s important to know the difference between actual cash value and replacement cost.
If you have actual cash value (ACV) coverage, your policy will pay the cost to repair or replace your home or personal property based on its value, considering its age and wear and tear (depreciation). ACV coverage pays for your loss but often does not pay enough to fully replace your property or repair the damage.
If you have replacement cost value (RCV) coverage, your policy will pay the cost to repair or replace your damaged property using materials of a like kind and quality. This is different from your home's market value, which includes the price of land and depends on the real estate market.
Here’s what the different types of coverage could look like in action.
Let’s say a family owns a house. The house has $10,000 worth of damage. They have replacement cost value coverage. So, their policy will pay $10,000 to repair the home, minus their deductible. (The deductible is the amount you pay out of your own pocket before your insurance policy kicks in.)
But if the family had actual cash value coverage, the payout would be different. If the family had $10,000 worth of damage to their home, the insurance company would consider the age and condition of the home when paying out the claim, minus their deductible.
If you need help deciding which policy is best for you, contact your state’s department of insurance or talk to your insurance agent/company. Additionally, the NAIC’s Shopping Tool for Homeowners Insurance offers more detailed information on this topic.
About the National Association of Insurance Commissioners
As part of our state-based system of insurance regulation in the United States, the National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. The U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally.