Actual Cash Value vs. Replacement Cost Homeowners Insurance


According to past research conducted by, almost half of the homeowners don’t know how to differentiate between actual cash value and replacement cost. In that regard, this article clarifies between the two for you to better understand the concept.

What is Actual Cash Value?

Actual cash value refers to an insurance company’s cost to homeowner insurance policyholders as compensation for the property damaged or lost. It’s determined after the deduction of the depreciation cost. Below is the formula:

 ACV=Replacement cost -Depreciation

In other words, it represents the selling price of the property at the time of loss. The depreciation cost is determinable by the type of policy you choose. Your insurer can determine the value by either doing a proper physical assessment or using any previous repair information. To understand better, let’s have a look at this example;

You have a couch that you bought for $5000.Unfortunately, your house gets burnt. You then decide to approach your insurer to compensate you for the loss. If your policy uses ACV to calculate the amount to pay for the loss, you will get less the amount upon compensation. That is because the actual cash-value takes into consideration the depreciation. Another way of determining the cost apart from using the actual property as a point of reference is to differentiate between purchase and loss.

Why do people choose actual cash value?

Some people like it because it is cheaper compared to other available options. Choosing it makes it easier for them to save a significant amount in the long run. However, the only drawback is that the compensation cost is calculated based on that time’s depreciative value of the property in the event of a loss.

What is the replacement cost then?

As the name goes, it is a form of compensation that allows you to acquire another property or item of the same quality and nature as that which was damaged.

Here is an Instance

Assuming you lose property and it happens that your homeowners insurance coverage uses replacement-cost, you are likely to spend none of the money on replacing the item because it’s your insurer’s mandate.

The Replacement Cost Compensation Procedure

Every company has a policy that dictates how it operates. Similarly, insurance companies have such policies to adhere to whenever they compensate you for losing your property. Surprisingly, some people do believe that they are entitled to full compensation immediately after a loss occurs. Unfortunately, that’s not always the case since the company policies determine everything.

If you incur a loss, and your homeowners insurance dictates that you use this compensatory option, you will have to write all the items damaged or lost. From there, the insurer will take some duration reviewing your request. You will then receive your compensation if the review process is successful. Furthermore, to make the option work best for you, you can go for an extended replacement cost.

You may be asking yourself the difference between the two. Opting for extended replacement cost qualifies you for a higher compensation regardless of your insurer’s specified limit. It allows for compensation of 125% to 150%.

Its advantage is that you will be fully compensated and get back to your initial status without spending any extra coin. Choosing extended replacement cost will also make you have confidence when approaching your insurer because you will be sure of the amount of compensation you are entitled to.

Besides, you can also opt for an alternative policy plan known as a guaranteed replacement cost. It allows you to get full coverage despite the specified limit. In case of a property loss, a guaranteed replacement cost will enable you to get total compensation. In the case of a house, the option will allow you to rebuild your home without having to struggle. It is one of the best dwelling coverage ever.

Opting for extended replacement cost is a good option for you when choosing a good dwelling coverage. Also, guaranteed replacement cost is a better option considering the highlighted benefit above.


All coverage options have their pros & cons it really comes down to the type of risk & level of risk the property owner is comfortable with. It’s also important to point out that each settlement option has certain eligibility requirements, this is where it’s important to discuss with your agent to ensure both your coverage requirements are met and the proper policy is written. Available coverage options vary based on state, property location, property type, age of dwelling, occupancy, condition of property, and other underwriting factors determined by each individual carrier. We recommend discussing this information with a licensed agent prior to purchase of any coverage.  If you’re interested in learning more, have a few questions, or would like a quick coverage review please give us a call and we’d be delighted to speak with you.


CityScape Insurance, LLC have used their best efforts in preparing this website resource. CityScape Insurance, LLC makes no representations or warranties with respect to the accuracy or completeness of the contents of this webpage and specifically disclaims any implied definitions and/or usage implied usage within. The accuracy and completeness of the information provided are not guaranteed or warranted to produce any particular results. Neither the publisher nor author shall be liable for any loss of profit or any other personal or commercial damages, including but not limited to special, incidental, consequential, or other damage.

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