What's the Difference Between Replacement Cost and Actual Cash Value Coverage?

​When choosing a homeowners insurance policy, you may hear the terms "actual cash value" or "replacement cost" coverage.  What's the difference?

Actual cash value (ACV) is the current value of your property MINUS depreciation at the time it was damaged or lost. For example, if your five-year-old laptop is destroyed, the payout you receive will be based on its current value, which will be less than what you paid for it when it was new.

Replacement cost coverage pays out the full cost of replacing your damaged property or lost items with brand new ones, regardless of their current market value or depreciation, so it provides greater protection. Using the laptop example above, you'll receive enough money to buy a brand new laptop of the same make and model.

There may be exceptions but most insurers require replacement cost coverage because it's in your best interest.  It costs more than ACV coverage, but that increase in premium is well worth the difference if you have to file a claim.

Replacement cost is determined by the insurance company, based on many specific factors, some of which include location, construction, square footage, and number of bathrooms.
​
Because of the specificity required for this calculation, it's important that you work closely with an independent insurance expert to ensure an accurate determination.