Insurance FAQ’s: What’s the difference between Replacement Cost and Actual Cash Value?

Insurance FAQ’s: What’s the difference between Replacement Cost and Actual Cash Value?

If you are researching homeowners insurance, there’s a good chance you’ve run across the terms “Replacement Cost” and “Actual Cash Value” when deciding what type of coverage you want. It’s important to understand the difference because your decision affects your coverage and premium different.

But what do they mean? Here’s the difference between Replacement Cost and Actual Cash Value when it comes to your homeowners insurance.

Actual Cash Value

The Actual Cash Value refers to the market value of the house at that moment. Appraisers determine the Actual Cash Value by deducting the depreciation cost from the replacement cost of the home. This level of coverage is your cheapest option because if you were to have a claim, the amount that you are paid out is less than the replacement cost coverage option.

If you choose this level of coverage, you most likely will have to pay out of pocket for a replacement item on your home. Because the actual cash value of an item takes the deprectiation costs due to wear and tear into consideration, you as the policyholder will receive less money from the insurance carrier than it would cost to buy a similar item.

Replacement Cost

On the other hand, Replacement Cost coverage awards the policyholder with the amount of money that is required to replace whatever was damaged at today’s cost (aka: more than the actual cash value amount). Many people choose this policy type because it helps you get back to normal without much (if any), additional out-of-pocket expenses from you.

Here’s an example of the difference: Your house unfortunately burns down in a fire.

If you had replacement cost coverage, you would receive a check from your carrier up to the amount that it would cost to build a similar home. You would be able to rebuild your home from scratch based on the current prices of labor and materials.

If you had actual cash value coverage, you would receive a smaller check because the carrier would take into account depreciation on the cost of your house. You would be responsible for personally financially covering the rest of the amount that it would cost to rebuild your home.

At Holley Insurance, we work with carriers that use the following coverages:

Guaranteed Replacement Cost: Pays full cost of repairing/replacing dwelling with no maximum dollar amount.

Extended Replacement Cost: Pays full cost of repairing/replacing up to a maximum of 125% of the insured dwelling value.

Replacement Cost: Pays a full cost of repairing/replacing up to a maximum of 100% of the insured dwelling value.

Curious about what you should do in your specific situation? Let us help! Give us a call at 540.334.4225

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A little more about Holley Insurance…

Holley Insurance was founded in 2000, and retains a core base of loyal clients. We have locations in Roanoke, Rocky Mount, and Forest, VA. As an independent insurance agency, Holley Insurance represents a carefully selected group of financially strong, reputable insurance companies. Therefore, we are able to offer you the best coverage at the most competitive price. Holley Insurance was named “Top Insurance Broker in Southwest Virginia” by Virginia Living Magazine for 2021. If you’re interested in starting a quote online or having us take a look at your current policies, click here!

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