Home Insurance Replacement Cost & Actual Cash Value. What's the Difference?

By Nancy B
January 06, 2023
We pledge to provide straight talk from our NNINS Virginia insurance experts. Read the Northern Neck Insurance INTEGRITY PROMISE.

What is Actual Cash Value Home Insurance?

A home insurance policy with actual cash value determines the value of the property by taking the cost to replace it and reducing based on things like age, and wear and tear, often referred to as depreciation. A homeowners insurance policy that provides actual cash value (ACV) coverage typically reimburses you for the depreciated value of the item or your dwelling is damaged or destroyed. Your local insurance advisor can help you determine how this might work in your situation, but we can provide examples.

Imagine a home fire damages your personal computer. Your homeowners insurance policy with ACV coverage would reimburse you for its depreciated value, which could be less than it will cost to purchase a new one. In other words, the reimbursement you'd receive after a covered claim might not equal the cost of replacing your computer.

Similarly, if the fire destroyed your home, rebuilding your home at today's prices will most likely cost more than the amount your insurance carrier will pay on a claim. This is even more important now as the supply chain fallout and labor shortage from the aftermath of the pandemic continue to impact the housing industry and the cost of home-building materials

What is inflation guard coverage?

Northern Neck Home Insurance has an automatic 4% inflation guard coverage on every policy to help our members have adequate coverage for costs that generally increase from year to year due to inflation. Inflation guard is coverage that automatically increases your policy’s dwelling coverage limit to account for rising construction costs. However, you may still be underinsured if your policy amounts aren’t updated to reflect the unprecedented inflation we are experiencing. Typically, the rising costs of building materials and labor vary from 4% to 8%. Since 2020, building material prices have increased 20.4%, year over year, and have risen 31.3% since January 2020 based on research from the Federal Bureau of Labor Statistics (BLS).

Worker removing paint from burned home ceiling

What is Homeowners Insurance Replacement Cost?

A home insurance policy with replacement cost coverage pays to repair or replace damaged property without deducting for depreciation. Your home insurance with replacement coverage will typically help cover the cost of buying a new item at today's price. For example, that same computer that was destroyed in a fire would provide enough reimbursement to purchase a new one of similar model and quality. 

Likewise, replacement cost coverage for your home does not consider depreciation factors such as age. If your home were destroyed in the fire, your replacement cost home insurance would typically help pay to repair or rebuild your home using materials of similar quality.

realtor showing woman house

If you have an older home, you may need a modified replacement cost policy. This type of coverage protects you from not receiving enough of a reimbursement to rebuild an older home with alternative materials used today such as drywall to replace plaster.

The Difference Between Actual Cash Value and Replacement Value

Replacement cost and actual cash value homeowners insurance both help with the costs of rebuilding your home or replacing damaged items after a covered loss.  Actual cash value policies are based on the items' or property's depreciated value while replacement cost coverage does not consider depreciation. If you're unsure whether you have an actual cash-value home insurance policy or replacement cost coverage, check your current insurance declaration page or call your local agent.

Remember the Deductible and Limits on Your Home Insurance Policy

Keep in mind, you usually pay a deductible before your insurance coverage kicks in when you file a home insurance claim. Both actual cash value and replacement value home insurance policies are subject to limits, which is the maximum amount your policy will pay toward a covered loss. Review your policy with an insurance advisor to be sure you understand which type of coverage your policy provides and the amount of your deductible and coverage limits. Your independent agent can help you make changes to fit your needs.


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THE NORTHERN NECK INSURANCE INTEGRITY PROMISE We pledge to provide straight talk and good counsel from our NNINS Virginia insurance experts through our blog. While we hope you find this to be a helpful source of information, it does not replace the guidance of a licensed insurance professional, nor does it modify the terms of your Northern Neck Insurance policy in any way. All insurance products are governed by the terms in the applicable insurance policy.