Replacement cost can vary from cash value in homeowners claims

By Marian Johns | | Sep 10, 2018

Actual cash value payouts are much smaller because they subtract the home or item's depreciation.   File photo

When it comes to our home and our family's belongings, it's often hard to place a certain value on those items. However, understanding the terms "actual cash value" and "replacement cost value" when it comes to your insurance, can be a huge factor in deciding what type of homeowners coverage you need. 

Actual cash value refers to taking your home or personal property and subtracting depreciation from the replacement cost, while replacement cost value (RCV) is the cost of rebuilding your home with the same materials at today's prices, explains Kin Insurance's director of insurance product management Kevin Turner.  

A replacement cost estimator is used to generate the replacement cost of your home, according to Turner, which takes into account things such as type of walls, square footage and flooring. 

Having actual cash value or replacement cost value can impact the cost of your premium, according to Turner. 

"Replacement cost coverage does cost more than actual cash value coverage, but this is an instance of you get what you pay for," he said. "Actual cash value payouts are much smaller because they subtract the home or item's depreciation. Insuring your home and belongings at their replacement cost means you get the payout you'd need to repair your home and replace your belongings with new items of similar quality." 

Turner said if you have actual cash value coverage, it's important to have receipts of your items along with descriptions of the make and model so you can receive a more reasonable payout. 

So which is better coverage if you should have to replace your home or personal belongings? 

"If the goal is adequate coverage, replacement cost is better," Turner said. "Though it costs a little more, this type of coverage offers you the means to replace your property with new items instead of looking for bargains or secondhand stuff."

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