Actual Cash Value vs. Replacement Cost Value (How Depreciation Affects Your Claim Payout)

Actual cash value and replacement cost value both refer to how much you will be reimbursed if you file an insurance claim for an approved loss. Actual cash value (ACV) coverage deducts for depreciation, meaning you will likely have to pay out of pocket to replace a lost item today, while replacement cost value (RCV) will usually reimburse you for the full cost to replace an item at today’s price.

Keep reading to learn the differences between ACV vs. RCV coverage.

Key Takeaways By default, insurance companies will reimburse you for a lost item’s actual cash value, which is the item’s value minus depreciation. Due to the depreciation deduction, a check for an item’s ACV is typically lower than what you paid to buy it. You can pay extra to upgrade your ACV coverage to replacement cost coverage, which does not deduct for depreciation. Homeowners insurance, renters insurance, auto insurance and several other types of insurance use ACV and RCV when determining how much to reimburse you after a covered claim. For standard homeowners insurance, your home's structure is typically already insured at its replacement cost value.

What Is Actual Cash Value?

An item’s actual cash value is how much it is worth after deducting for depreciation factors like age, wear and tear and for cars, mileage. Actual cash value coverage is the default coverage in auto insurance, renters insurance, for your personal belongings for homeowners insurance and other types of insurance policies.

How Does Actual Cash Value Work?

Some insurance companies calculate ACV by dividing the cost of an item by how many years it’s expected to last.^[1] To demonstrate, let’s say you’re filing a homeowners insurance claim for a fridge that burned in a house fire. You bought the fridge six years ago for $700 and fridges have an expected lifespan of 12 years.^[2]

Dividing $700 by 12, we learn that your fridge depreciates by about $58 each year. Since it was six years old or halfway into its expected lifespan, your insurance company would reimburse you for around $350.

Cars can depreciate much quicker, with most cars already losing 20% of their original value in the first year and after five years, may be worth only 60% of their original purchase prices.^[3] If you bought your car five years ago for $50,000, your auto insurance company may only reimburse you for $30,000 if it becomes totaled in a covered car accident. On a related note, if you’re still paying off your car, you will still have to make payments on a car you can no longer drive unless you buy gap insurance.

Pros & Cons of ACV Coverage

Pros	Cons
Cheaper than RCV coverage	You will likely still have to pay out of pocket to replace an item with a similar model

What Is Replacement Cost Value?

As the name suggests, an item’s replacement cost value refers to the cost to replace an item with a comparable item today. Replacement cost coverage makes no deduction for depreciation.

How Does Replacement Cost Value Work?

When getting reimbursed for an item’s replacement cost value, you will typically receive two checks: A first check for the item’s actual cash value and then a second check for the item’s recoverable depreciation. That said, you will typically receive the check only after you replace the item and submit a receipt so that you’re reimbursed for the item’s exact replacement cost.

Using our fridge example from earlier, let’s say you have replacement cost coverage in your homeowners insurance policy. You receive a check for $350, the item’s actual cash value and you buy a new fridge for $700. After submitting the receipt, you receive a second check for $350.

For standard homeowners insurance, replacement cost coverage is standard for dwelling coverage, which insures the structure of your home.^[4] However, it may be possible to purchase replacement extended RCV coverage, which increases your dwelling coverage limits by up to 100% or guaranteed RCV coverage, which pays whatever cost to rebuild your home, generally with no cap.^[5][6]

Pros & Cons of RCV Coverage

Pros	Cons
No deduction for depreciation	Still have to replace an item out of pocket and get reimbursed after the fact
You can replace a lost item at today’s market value	Costs more than ACV coverage

What’s the Difference Between ACV and RCV?

The key difference between ACV and RCV is in how much your insurance company pays you in the event of an approved insurance claim. Since ACV takes depreciation into account, you will be reimbursed for less than what you paid for an item, with the difference being greater if the item is older and has experienced extensive wear and tear.

RCV, on the other hand, covers the cost of replacing a damaged item with a new one of comparable quality, without considering depreciation. As a result, an RCV payout is higher than an ACV payout on the same claim.

Can I Switch From ACV to RCV?

Ask your insurance company for a quote on how much extra it would cost to upgrade your coverage from ACV to RCV and when you would like the new coverage to start. For example, for homeowners insurance, upgrading from ACV coverage to RCV coverage can increase your premium by 10% to 20% according to John Espenschied, the owner of Insurance Brokers Group in St. Louis, Missouri.

With auto insurance, there may be a time limit on when you can buy RCV coverage. For example, new car replacement coverage is offered by Allstate for cars under two years old and by Liberty Mutual for cars less than one year old.^[7][8]