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Actual Cash Value vs. Replacement Cost Homeowners Insurance

When it comes to your home sweet home, you want to make sure your insurance actually covers it. But it’s not always easy to sift through all the options. Sometimes trying to find the right amount of homeowners insurance can feel like looking for a needle in a haystack. It’s hard!

One of the questions that comes up is whether to get actual cash value or replacement cost coverage. Getting this right can make a big difference to your finances if your home ever had to be rebuilt.

We’ll explain the differences between actual cash value vs. replacement cost insurance and how to know which one is best for you.

Ready? Let’s jump in!

Understanding Homeowners Insurance Policies

Just like ice cream flavors, streaming services and places to eat, there are a ton of options when it comes to homeowners insurance. No one-size-fits-all policy will cover you against every kind of natural disaster. This can be good since you can customize to infinity (and beyond!)—but it can also make it hard to know exactly what you need.

Protect your home and your budget with the right coverage!

You want the best protection at the best price—you don’t want to be underinsured but you also don’t want to pay sky-high premiums for coverage you don’t actually need. (If you’re looking for an overall understanding of how homeowners insurance works, check out our Homeowners Insurance Guide.)

Now, let’s look at the three main types of homeowners insurance.

Actual Cash Value (ACV)

Replacement cost and actual cash value are different levels of coverage within your homeowners insurance policy. They both have to do with how much your insurance company will reimburse you for damage to your home after an incident that’s covered by your policy.

Actual cash value (ACV) will pay to repair or replace your home and personal belongings, minus depreciation. Replacement cost, on the other hand, does not factor in depreciation, which means your insurer will end up paying more of your losses. Most homeowners insurance policies include replacement cost coverage for your home but actual cash value for your belongings.

Similar to health insurance plans, you could think of actual cash value as the Bronze level of reimbursement plans. It’s not bad, but it could be better.

Here's an example of how actual cash value policies work. Let’s say somebody steals your TV while you’re on vacation. The insurance company will pay what the TV was worth when it got stolen—not when it was new in the box.

The benefit of actual cash value is that you’ll pay less in monthly premiums. The downside is that the check your insurance company sends you might not be enough to actually replace the items you lost or to rebuild your home at today’s construction costs.

Replacement Cost Value (RCV)

Replacement cost value (RCV) offers better protection because it doesn’t consider depreciation. It will pay to repair or replace your home up to the home’s original value (within certain limits) and with similar materials.

Let’s take that TV example again. If someone stole your 4K Ultra-HD flat-screen, replacement cost coverage would mean your insurer would pay you to buy a new TV that was the same model and quality. Sweet!

Replacement cost coverage is like the Silver plan. It gives you more coverage than actual cash value but it’s also more expensive. And it might fall short of what you need because it will only pay up to your dwelling coverage limits. For example, if your replacement cost is $350,000 but your dwelling coverage limit is $300,000, you’ll only get $300,000.

Guaranteed or Extended Replacement Cost

Guaranteed or extended replacement cost coverage pays the full replacement cost if your home is destroyed. It doesn’t take into account depreciation or dwelling coverage limits. So if the rebuild costs $350,000, that’s what the insurance company will pay. Simple.

Guaranteed replacement cost is the Gold plan. It’s more expensive, but it’s especially helpful if you live in an area where construction costs are rising quickly (which seems to be nationwide in 2021). It also comes in handy if your home is at relatively high risk of being damaged due to your location.

Which Is Best?

After looking at actual cash value vs. replacement cost coverage, you might be wondering which one is better.

We’re just going to come right out and say it. You should get guaranteed or extended replacement cost coverage. This way, if a tornado rips through your neighborhood and destroys your home, the insurance company will pay to rebuild it, no matter what. You won’t have to worry about any out-of-pocket costs. It’s worth the extra money you’ll pay in your premium.

And if you think you might already have enough coverage in place, check your insurance declaration page to see what you’re currently paying for.

Another tip is to keep an inventory of your belongings, including what each item is worth. This way you have a record if you need to file a claim. And you should calculate how much it would cost to rebuild your home so you know how much coverage you might need.

We Can Help

It can be hard to get the right amount of homeowners insurance. It’s also a lot of work to sift through multiple quotes from different insurance companies and compare policies.

That’s why we recommend working with one of our insurance agents who is part of our Endorsed Local Providers (ELP) program. They’re RamseyTrusted and have the heart of a teacher. This means they’ll shop for you—for free—and find you the best coverage at the best price. What’s not to like about that?

Connect with an ELP today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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