Replacement cost vs. actual cash value

If you’ve ever bought insurance, you’ve probably heard of replacement cost and actual cash value. But what do they actually mean for your policy?

You need to know these two terms and what they mean to understand the fine print when buying insurance. Here’s where to start.

Replacement cost

When your policy covers replacement cost, it refers to replacing the item you’re insuring. For example, if you were to insure your roof for replacement cost, it would cover replacing the roof to its original condition (a new roof). It could also cover buying new items similar in kind and quality to the original item. For example, say you had a 10-year-old refrigerator. With replacement cost, you would receive enough to buy a brand new refrigerator of a similar model even though yours is 10 years old.

This obviously has advantages when collecting a payout but it may come with slightly higher premiums than an actual car value policy.

Actual cash value (ACV)

A policy that covers actual cash value is a little different. It takes depreciation into account.

Where replacement cost covers replacing items as they would have been in their original condition, actual cash value covers replacing items in their current condition. For example, if you were to try to replace a 10-year-old roof with ACV, the value of the roof in its current condition could be thousands less due to depreciation.

Actual cash value may be cheaper than replacement cost, but it can be much less helpful if you’re trying to replace something expensive. Some homeowners have been rudely shocked when they realized that they thought their roof was covered under replacement value when they’d actually taken out an ACV policy.

Which is better?

Replacement cost is almost always better than ACV. ACV may not cost as much in premium as replacement cost, but you need to consider if the cost savings is worth the risk and hassle of receiving a significantly reduced payout at the time of claim. Talk to your broker about what works best for you.

Need a hand choosing the right policy? We can help. MVP Insurance can guide you toward the right insurance for you. Contact us today.