Understanding Replacement Cost and Actual Cash Value for Your Homeowners Insurance Policy

Understanding the terms used in your homeowners insurance policy is vital to getting the full picture of what exact your coverage is able to protect.

Both replacement cost and actual cash value are terms that have to do with how much your homeowners insurance policy will compensate you for your damaged property under a covered claim or peril.

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Replacement cost and Actual Cash Value 

Replacement Cost Coverage

Like the name suggests, replacement cost policies help to replace or repair your damaged property. Unlike actual cash value coverage, replacement cost policies do not factor in depreciation for that item. 

Replacement cost coverage for personal property 

Replacement cost coverage for your personal property means that your insurer will reimburse you for the cost of buying that item new at current rates (so long as that item is lost through a covered peril). That means if you lose your comfy leather couch in a fire, you’ll be compensated enough money to buy a new couch of the same quality. 

The Insurance Information Institute suggests that you keep a list of personal possessions and estimates on their replacement cost in case a situation like this arises. 

Dwelling coverage 

The majority of homeowners insurance policies cover the replacement cost for your dwelling (home). When repairing or rebuilding your home, similar materials are typically used as replacement. If your home is vandalized, the replacement cost coverage part of your dwelling coverage will insure that your walls are replaced with similar quality materials as the original.

Note: If you have an older home it may be necessary to alter your replacement cost coverage to accommodate the cost of rebuilding less common features in older houses such as plaster walls.

Actual Cash Value Coverage 

Actual cash value coverage calculates the amount your insurance company will pay based off of the cost of replacement minus depreciation for factors like wear and tear or the age of an item. 

Personal property coverage featuring an actual cash value coverage will compensate you for this depreciated value.

That means if your dining table is engulfed in a fire, your policy with reimburse you for how much that table is worth now (including depreciation). This may not always be enough to cover a new one of equal quality.


Both replacement cost and actual cash value coverages are subject to limits. For more information about your coverage limit and deductibles, consult your policy and talk to your local agent.

What Does Your Homeowners Insurance Policy Offer You?

Every homeowners policy is different. For more information on replacement cost and actual cash value coverages check your homeowners insurance policy and contact an agent today!

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