Two policies can cover the same things and pay very different amounts after a loss. The difference is depreciation.
Key facts
- Replacement cost coverage pays what it costs to replace an item with a new one of similar kind and quality.
- Actual cash value pays replacement cost minus depreciation, so older items are worth less.
- Replacement cost coverage usually costs more but pays more after a loss.
- Some insurers pay actual cash value first and the rest once you replace the item.
When you make a claim for damaged or stolen belongings, the payout depends on how your policy values them. There are two main methods.
The two methods
| Replacement cost | Actual cash value | |
|---|---|---|
| Pays | Cost of a new, similar item | Replacement cost minus depreciation |
| Older items | Paid at today’s price for a new one | Paid at a reduced, depreciated value |
| Premium | Usually higher | Usually lower |
An example
A five-year-old television would cost $800 to replace today. If the insurer depreciates it by half, actual cash value pays $400, while replacement cost pays $800, before your deductible in either case. Figures are illustrative.
How payments are made
Many insurers with replacement cost coverage first pay the actual cash value, then pay the remaining amount once you’ve replaced the item and shown the receipt. Keep receipts and follow the insurer’s time limits for claiming the rest.
Smart tip
Ask whether your policy includes replacement cost coverage for both your home and your belongings. Sometimes the dwelling is on replacement cost but personal property isn’t.
Check this
Roofs are often treated differently. Some policies pay actual cash value for older roofs, which can leave a large gap after storm damage.
Choosing coverage
If you couldn’t afford to replace your belongings at today’s prices, replacement cost coverage is usually worth the extra premium. Pair it with an up-to-date home inventory and the right limits, as explained in our guide to what homeowners insurance covers.
Questions we hear
Which one does my policy use?
Check the declarations page and the personal property section of your policy. If it isn’t clear, ask your insurer.
Does this apply to the house itself?
Yes. Dwelling coverage can be on a replacement cost or actual cash value basis, and the difference can be large for an older roof or home.
What is extended replacement cost?
An option that pays a set percentage above your dwelling limit if rebuilding costs more than expected.
This guide is general information, not insurance or legal advice. Coverage, prices and rules vary by insurer and by state, so read your policy documents and check with your insurer, a licensed agent or your state’s department of insurance before you decide.