One of the most confusing aspects of purchasing homeowners insurance is the difference between replacement cost coverage and actual cash value coverage.

But here’s the thing:

It doesn’t have to be that complicated, and once you understand the concepts you will be a master at knowing the differences. In this post today, I will help you understand actual cash value vs replacement cost, as well as how the payout process works.

What Is Replacement Cost?

Think of replacement cost coverage as something that will completely replace an item that has been damaged or destroyed due to a covered loss.

For example, if you purchased a computer 2 years ago and it was destroyed in a Tornado, you would be given the amount it would cost to replace the computer.

This is better than actual cost value because it’s a total replacement vs only paying you what the laptop is currently worth.

What is Actual Cash Value?

While the concept is easy to understand, actual cash value is not easily defined.

It has been interpreted to mean “fair market value” – the amount a buyer would pay a seller if neither were under undue time constraints; while the insurance industry defines it as the cost to replace with new property of like kind and quality, minus depreciation.

While an insurance company loves this to be your chosen payout method because it saves them more money over time.

It isn’t the best option for the policy owner because you lose out on actually being able to fully replace the item.

The Actual Cash Value (ACV) option basically pays out what the value is currently worth.

Don’t let the actual cash value leave you in a rough position because it is essentially taking a loss twice, once from the incident that damaged your item and once again on the payout.

Actual Cash Value Vs Replacement Cost

The primary difference between replacement cost and actual cash value is a deduction for depreciation. However, both are based on the cost today to replace the damaged property with new property.  You can understand how on a larger scale the actual cash value policy could really cost you in the long run.

Actual Cash Value

The ability to have your damaged or destroyed item replaced with an item of the same quality minus depreciation.

Replacement Cost

The ability to have your damaged or destroyed item replaced with an item of the same quality and for the same function

How Does The Replacement Cost Payout Process Work

Now that you understand how replacement cost coverage works, let’s discuss how you get paid out on a policy.

There is a bit of confusion when it comes to this; however, you much replace the items first before you are able to collect a full settlement.

You will probably have to also provide a solid amount of information before you receive the full settlement.

You will probably have to provide a detailed list and give the insurance company some time to review everything.

Once that process is complete you will have the opportunity to review the home insurance company’s offer.

What Type Information Will They Need?

When you are looking to be fully compensated for the replacement cost of items you will need to supply a list of:

  • The item descriptions with makes and models if applicable

  • When you originally purchased each item

  • The price you paid for each Item

  • The item’s replacement value today

  • Any photos showing the condition of the items

  • The original receipts, if possible

Now:

You probably aren’t going to have receipts for everything you owned, especially for things like every pair of underwear or a few reams of paper.

However, you will probably have the receipt for a laptop, your videogame system, a flat screen tv, and your refrigerator.

Just remember that every insurance company has their own requirements so you need to ask the insurance adjuster for some guidelines to help you fill out your proof of lost items list.

The Two-Step Process of Replacement Cost Claim

When you have a replacement cost policy you will receive two checks before you have the total compensation.

The first check will the the actual cash value of all the items.  At that point you must prove that you have replaced the items. Once you have replaced the items you will usually receive the final payment.

If you replace the items over time you can submit your expenses along the way, just as you might research How Much Does The Average Funeral Cost By State? when planning for future costs. Your payout is going to depend heavily on things like how accurately you can describe, document and show the lost value of your personal property. You should keep a home inventory list of these items, the more details and proof the better.

Take Action

When you start looking for your homeowners policy you should be a pro when it comes to determining actual cash value vs replacement cost. In my opinion, the best option to go with no matter what is the replacement cost option.

If you already have coverage you need to reach out to your company asap and see which payout option you have set up. There is no need to wait if you don’t have coverage, you can click on any of the button above to get started.