In this article:
When you experience a house fire, hurricane or burglary, renters or homeowners insurance can come to the rescue. Both homeowners and renters insurance pay to replace personal possessions after a covered loss, but how much they pay depends on the type of personal property coverage you have. Replacement cost coverage pays to replace your possessions with comparable new ones; actual cash value coverage pays what your possessions were worth at the time of the loss.
| Replacement Cost vs. Actual Cash Value | |
|---|---|
| Replacement Cost Coverage | Actual Cash Value Coverage |
| Covers the cost to replace an item with a brand-new item of similar specifications | Covers the cost of the actual depreciated value of your items |
| Typically pays out more than actual cash value coverage | Typically pays out less than replacement cost coverage |
| Provides greater protection against losses | May not fully cover your losses |
| May cost you more in premiums | May cost you less in premiums |
What Is Actual Cash Value Coverage?
Actual cash value insurance pays you what your destroyed or stolen property is currently worth, which may be less than the cost of replacing it. Insurance companies typically calculate actual cash value by determining the cost to replace an item, then subtracting an amount based on how much the item has depreciated over time.
Property depreciates, or loses value over time, due to wear and tear and other factors. Insurers calculate depreciation using a variety of factors, including the item's age, condition and expected useful life. Furniture, appliances, clothing, books, toys, electronics and sporting equipment are among the household items that generally depreciate as time passes.
If a couch you purchased for $2,000 four years ago was destroyed in a fire, actual cash value coverage might pay you $1,200 to replace it based on depreciation. This could be enough to replace your old couch with a similar one if you can find something on sale or don't mind buying a used couch. However, if you want a comparable couch and can't find one for $1,200, you'll have to pay the difference out of pocket.
What Is Replacement Cost Coverage?
Replacement cost coverage pays to replace your personal property with comparable new items. However, you won't receive the money to do this all at once. First, the insurer will pay you the actual cash value of your items. Then you'll need to replace the items and give your insurance company copies of the receipts. If the insurance company approves the claim, you'll receive a second payout making up the difference between the item's actual cash value and the amount you paid for the replacement.
Using the couch example above, here's how replacement cost coverage would work.
- You receive $1,200, the actual cash value of the couch.
- You purchase a comparable couch for $2,000 and provide a receipt.
- The insurance company pays you the $800 difference.
What if you decide to splurge on a nicer $3,000 couch?
- Replacement cost coverage only pays for a comparable item, so you'll still receive a total of $2,000.
- The extra $1,000 for a nicer couch will come out of your pocket.
How about if you find the $2,000 couch on sale for $1,500?
- Replacement cost coverage reimburses you only for the amount you spend.
- In this case, you'd receive a total of $1,500, not $2,000.
Keep in mind that whether you have replacement cost or actual cash value coverage, you'll be responsible for paying any deductibles your home or renters insurance policy imposes.
Replacement Cost vs. Actual Cash Value Coverage: Which Is Better?
Whether replacement cost or actual cash value coverage is better for you depends on a variety of factors, including your budget, the type and value of your home's furnishings and your risk tolerance.
Replacement cost coverage may be right for you if:
- You can afford the extra cost. Paying more for premiums may be worth it to you, especially if there's minimal difference between the price of actual cash value and replacement cost coverage.
- You own many possessions that depreciate rapidly. For example, clothing depreciates quickly because its useful life can be as short as one year. If you have a big collection of designer clothing, replacement cost coverage helps ensure you can replace it.
- You have a lot of personal property. If you have a big family or a large home packed with furnishings, replacement cost coverage could give you peace of mind.
- Your area is prone to natural disasters. Living in a region where floods or fires are common could increase the odds of losing all your possessions at once. Replacement cost coverage can make replacing everything more manageable.
- You're willing to pay for convenience. Replacement cost coverage makes replacing your belongings easier. Instead of hunting for bargains to bring prices down to your old items' actual cash value, you can buy equivalent replacements without worry.
Actual cash value may be right for you if:
- Saving money on premiums is your main concern. Before choosing actual cash value coverage, however, check the price difference with your insurance company. Replacement cost coverage could be more affordable than you think.
- You wouldn't mind replacing your belongings with older or lesser-quality items. Perhaps you're OK with a used couch or a smaller TV set than you used to have.
- You have time for bargain hunting. Finding comparable new replacement items for the actual cash value of the old ones is likely to require some legwork, such as monitoring prices, waiting for sales or shopping used. If that sounds like a hassle, replacement cost coverage could be a better fit.
- You're comfortable with some risk. Actual cash value coverage involves more risk, since you're responsible for part of the cost of replacing your belongings with equivalent items.
To get an idea of how actual cash value or replacement value coverage might affect your finances after a loss, start by making a home inventory of your belongings. Then you can estimate the actual cash value of your possessions using the depreciation calculator at Claims Pages, a website for insurance professionals. Calculating actual cash value isn't an exact science, and claims adjusters may use a variety of methods, but this tool should help provide a ballpark range.
If you're unsure what type of coverage your current renters or homeowners insurance policy includes, review your policy details or ask your insurance agent to find out.
The Bottom Line
Even if your homeowners or renters insurance includes replacement cost coverage, you'll have to cover part of the cost of purchasing new items until your insurance company reimburses you. A solid emergency fund can help you handle this expense. Using a credit card with a 0% introductory annual percentage rate (APR) on purchases is another option.
You can buy replacement possessions with a 0% intro APR credit card and pay off the balance before the promotional period ends to avoid paying any interest. These credit cards typically require good to excellent credit. Checking your FICO® Score☉ before you apply can help you identify the cards you may qualify for. Experian can also show you 0% intro APR credit cards matched to your credit profile.