Actual Cash Value vs. Replacement Cost: What’s the Difference?

One pays the current value, minus depreciation; the other pays the full cost to replace your property.

Cassidy Horton
Writer | Insurance, Banking, Personal Finance

Cassidy Horton is a freelance writer covering pet and home insurance. She holds an MBA and a bachelor's in public relations from Georgia Southern University, and she's worked with top finance brands like Forbes Advisor and Consumer Affairs. Cassidy first became interested in personal finance after paying off $18,000 in debt within 10 months of graduating college. She later went on to triple her salary in two years by ditching her 8-to-5 job to write for a living. Today, Cassidy is the founder of Money Hungry Freelancers, a platform dedicated to helping other freelancers build a strong financial foundation. In her spare time, she enjoys hiking around the Pacific Northwest and hunting down the best fried chicken in town. She is based in Seattle, Washington.

Caitlin Constantine
Assistant Assigning Editor | Home insurance, renters insurance, pet insurance

Caitlin Constantine is an assigning editor at NerdWallet, focusing on homeowners, renters and pet insurance. She has more than 15 years of experience in digital media, including as the deputy managing editor at The Penny Hoarder and as a digital producer for a 24/7 news station based in the Tampa Bay area. Caitlin enjoys exploring the ways technology can help people become better informed about the world. She currently lives outside Asheville, North Carolina.

Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

You come home after a long day to discover shattered glass, ransacked rooms and stolen possessions. Your heart sinks as you realize the magnitude of the burglary. Thankfully, you have homeowners insurance.

But here's the catch: Will the insurance company pay enough money to replace your stolen items with brand-new ones? Or will you receive only a fraction of what you originally paid for them?

Understanding the difference between replacement cost coverage and actual cash value can help you choose the right coverage for your needs.

What is actual cash value coverage?

Actual cash value (ACV) coverage calculates your claim payout based on an item's original cost, minus depreciation. Depreciation is the decrease of an item’s value over time due to wear and tear. This means the payout you receive may be less than what it costs to replace that item with a brand-new one. It’s the most common payout method for personal property coverage .

Here’s an example: Someone breaks into your house and steals your 2-year-old laptop. You have ACV coverage. The insurance company takes the original cost of the laptop, calculates its depreciated value, then pays you based on that amount.

If you paid $2,000 for the laptop and the insurance company says it’s worth $1,400 today, that’s how much you’d get back, minus your deductible . Your deductible is the part of your home insurance claim you’re responsible for paying.

What is replacement cost coverage?

Replacement cost coverage allows you to replace damaged or lost property with new items of similar kind and quality. It doesn't consider depreciation, so you receive the full cost to replace the item regardless of its age or condition, minus your deductible.

Let’s go back to the example with the 2-year-old laptop. Instead of actual cash value coverage, your policy has replacement cost coverage. Replacement cost coverage would pay for a new laptop of similar quality and features.

So if the closest model to your stolen laptop costs $2,200 today, you’d first get one check for the actual cash value of your laptop ($1,400 in the previous example), minus your deductible. Then, you’d buy your new laptop, submit the receipt to your insurance company and get a second check that covers the difference.

Actual cash value vs. replacement cost

You might come across both ACV and replacement cost coverage in your insurance policy, depending on what’s being covered. Your house is typically covered on a replacement cost basis. For personal belongings like electronics, furniture or clothes, the insurance company usually offers ACV coverage by default.

Replacement cost coverage likely costs more than ACV coverage, as it provides more comprehensive protection. However, replacement cost coverage also ensures homeowners can replace their items without having to pay out of pocket.

Not sure if ACV or replacement cost coverage is right for you? Take how much you’d save on premiums and weigh it against the amount you’d pay out of pocket should you face a major loss. You may find that the savings on your premiums are canceled out if you make a claim and the payout is less than what you’d need to replace your lost belongings.

Types of replacement cost coverage

By default, replacement cost coverage pays to rebuild, repair or replace your property, up to your policy’s limit. But what if you need more money than your policy allows? These options can give you more coverage.

Extended replacement cost

Extended replacement cost coverage is an optional add-on to your home insurance policy. It's designed to help cover the cost of rebuilding your home if it's more than your policy limit allows.

Suppose your home is insured for $300,000 and you have a standard replacement cost policy. If your home is destroyed in a fire and it costs $375,000 to rebuild because the costs of materials and labor have skyrocketed, your insurance company will pay up to the policy limit of $300,000, minus your deductible. You would be responsible for the remaining $75,000.

But extended replacement cost coverage would pay an additional percentage above the policy limit, often 20% to 25%. So if you have 20% replacement cost coverage, your insurance company would pay up to $360,000 (minus your deductible) to rebuild your home. This would leave you responsible for $15,000 instead of $75,000.

Guaranteed replacement cost

With guaranteed replacement cost coverage , your insurance company agrees to pay the full cost to rebuild your home, no matter what it costs. In the example above, your insurance company would pay the full $375,000 to rebuild your home. This means that you won't pay any out-of-pocket expenses other than your deductible.

Replacement cost vs. actual cash value: How to decide

Considering these factors can help you decide whether actual cash value or replacement cost coverage type is best for you:

Budget. If you want to save money on insurance, actual cash value coverage is usually cheaper. However, you may not get enough to buy new replacements for the belongings you lost, so balance the savings on your premium against what you’d have to pay out of pocket should you have to file a claim.

Risk tolerance. If you want more financial protection and are willing to pay extra for it, replacement cost coverage could save you thousands should you have to file a large claim.

To find out if you have actual cash coverage or replacement cost coverage, ​​check your home insurance declarations page or call your agent.

You’re following Cassidy Horton
Visit your My NerdWallet Settings page to see all the writers you're following.

Cassidy Horton is a freelance writer who specializes in pet and home insurance for NerdWallet. She holds an MBA and has written more than 1,000 articles about personal finance. See full bio.

On a similar note.

Free homeowners insurance comparison

Compare top home insurance companies.

Download the app

Disclaimer: NerdWallet strives to keep its information accurate and up to date. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. All financial products, shopping products and services are presented without warranty. When evaluating offers, please review the financial institution’s Terms and Conditions. Pre-qualified offers are not binding. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly.

NerdUp by NerdWallet credit card: NerdWallet is not a bank. Bank services provided by Evolve Bank & Trust, member FDIC. The NerdUp by NerdWallet Credit Card is issued by Evolve Bank & Trust pursuant to a license from MasterCard International Inc.

Impact on your credit may vary, as credit scores are independently determined by credit bureaus based on a number of factors including the financial decisions you make with other financial services organizations.

NerdWallet Compare, Inc. NMLS ID# 1617539

California: California Finance Lender loans arranged pursuant to Department of Financial Protection and Innovation Finance Lenders License #60DBO-74812

Insurance Services offered through NerdWallet Insurance Services, Inc. (CA resident license no.OK92033) Insurance Licenses

NerdWallet™ | 55 Hawthorne St. - 10th Floor, San Francisco, CA 94105