These two coverage options have different ways of calculating the amount your insurance may pay you if you suffer a loss.
What is Replacement Cost?
Replacement Cost is the amount it costs to replace, repair, or rebuild damaged or stolen property without depreciation. In other words, it is what it would cost to replace, repair, or rebuild at today’s costs.
For example, if you have a fire in your kitchen, and your stove is damaged, Replacement Cost reimburses you enough to purchase a new stove of a similar model or quality.
Replacement Cost provides more protection than actual cash value coverage, but that typically comes at a higher premium cost.
What is Actual Cash Value?
Actual Cash Value is the amount it costs to replace damaged or stolen property minus depreciation. Meaning, it accounts for factors, such as age and wear and tear, when replacing the property.
For example, if you have a fire in your kitchen, and your stove is damaged, Actual Cash Value reimburses you for the cost of your stove at a reduced amount due to its age and condition.
If you have Actual Cash Value coverage, you’ll typically pay a lower premium compared to if you have Replacement Cost coverage.
Is Replacement Cost or Actual Cash Value better to have?
Both RC and ACV are based on what it costs today to replace your damaged property with new property. The difference between the two is that ACV factors in depreciation.
In some situations, Replacement Cost may not always be an option. For example, if the roof on your home were older Actual Cash Value would apply in many instances. When you buy a car, the value begins to drop as soon as you drive it off the lot, which is why auto insurance policies typically don’t offer replacement cost on vehicles.
It is important to clearly understand the difference between RC and ACV to determine which is better for you. An independent insurance agent can help with this.