How much your home insurance company pays out on a covered loss depends on whether your homeowners policy provides for actual cash value (ACV) or replacement cost value (RCV).
What is actual cash value?
Actual cash value (ACV) refers to the current market value of an item. To calculate the ACV amount, insurance companies subtract the item’s depreciation (due to age and condition) from its full replacement cost. This new amount represents what the item is worth today, not what it would cost to replace it brand new.
For example, let’s say the personal laptop that you bought for $2,000 four years ago got damaged in a fire. If you have ACV, your insurance company would pay you what the laptop’s market value is today, which may only be $800, due to depreciation.
| EXAMPLE: Damaged Laptop With ACV | |
|---|---|
| Original price | $2,000 |
| Depreciation from age and condition | $1,200 |
| Actual cash value | $800 |
What is replacement cost value?
Replacement cost value (RCV) refers to the full cost to replace an item with a brand-new, similar one at today’s prices. RCV does not factor in depreciation due to age or condition.
Let’s look at the same $2,000 laptop as an example—but this time, let’s pretend you have RCV. Now if the laptop was damaged in a fire, your insurance company could pay you more than the original price of $2,000 due to inflation. That’s because a similar model probably costs more now than it did four years ago.
| EXAMPLE: Damaged Laptop With RCV | |
|---|---|
| Original cost | $2,000 |
| Increased cost of similar item due to inflation | $200 |
| Replacement cost value | $2,200 |
The difference between ACV and RCV
The key difference between ACV and RCV is how depreciation is handled. ACV coverage takes depreciation into account, which usually results in lower payouts. On the other hand, RCV coverage does not factor in depreciation, which usually leads to higher payouts.
Another way they differ is the cost of having actual cash value vs. replacement cost home insurance on your policy. Because ACV offers less coverage, your policy’s annual premium may be lower. Conversely, because RCV offers full coverage, it may cost you a few dollars more, making your premium higher.
These rules hold true whether you have a home, renters or condo policy.
| ACV Features | RCV Features |
|---|---|
| Pays you what the damaged or stolen item is worth at the time of loss (i.e., its depreciated value) | Pays you to replace the damaged or stolen item with a brand-new, similar item at today’s prices |
| Factors in age and condition | Does not factor in age and condition |
| Usually results in lower payouts | Usually results in higher payouts |
| Lower premium | Higher premium |
How to choose the coverage that’s best for you
Choosing between ACV and RCV usually depends on your financial situation and how much risk you’re willing to assume. Basically, you need to decide if you prefer more coverage for a higher premium or less coverage for a lower premium.
- Choose RCV if you prefer more coverage and don’t mind paying a slightly higher annual policy premium.
- Choose ACV if you want to keep your home insurance premium as low as possible. Just remember that ACV will reimburse you based on the depreciated value of your belongings.
Does my home policy provide ACV or RCV?
Structures on your property
Most homeowners insurance policies automatically come with replacement cost value coverage for your primary dwelling and other detached structures on your property. Typically, your dwelling coverage limit is equal to the home’s RCV.
Your personal belongings
Most standard home insurance policies default to actual cash value for damaged or stolen personal property. However, for an added cost, you can purchase replacement cost value coverage.
What is roof ACV?
Roof ACV is a home insurance endorsement that changes how your carrier pays for covered roof damage.
- With replacement cost value (RCV): Your payout is based on the full cost of brand-new roofing materials, minus your deductible.
- With actual cash value (ACV): Your payout is based on the full cost of brand-new roofing materials, minus your deductible, and minus depreciation due to the roof’s age and condition.
Simply put, ACV payouts will be lower than RCV payouts for the same roof since ACV factors in how much value the roof has lost over time. The good news is that a roof ACV endorsement generally lowers your annual premium.
To find out if your roof is covered at ACV or RCV, look at your home policy’s declarations page.