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Deciding Between Replacement Cost And Actual Cash Value

Thursday, January 21, 2021

A view of a living room.

When choosing a Homeowner’s Insurance policy to protect one of your most significant assets, there are some crucial decisions you will need to discuss with your insurance agent. Every homeowner wants peace of mind if something catastrophic should happen to your dwelling, so it’s important to have a clear understanding of the choices for how your home and belongings are replaced.

Actual Cash Value vs. Replacement Cost Home Insurance

In the most simple terms, Actual Cash Value takes into consideration the depreciated value of your property. A better way to understand the actual cash value definition is to apply the object’s fair market value. In contrast, Replacement Cost Home Insurance will pay to replace your home or valuable item with a brand new version.

A great example would be the theft of a five-year-old flat-screen television. Actual Cash Value insurance will apply a fair market value minus the expected depreciation of wear and tear. How is Actual Cash Value calculated? Insurance companies like Independent Insurance Associates have charts and calculations to determine your older belongings’ depreciation. Conversely, Replacement Cost will pay to replace your old TV with a brand new version.

Choosing between Actual Cash Value and Replacement Cost

When planning your home insurance needs, your policy’s actual expense may help you determine your choice. Remember, the Actual Cash Value home insurance definition is based on fair market value, so your policy is typically less expensive on an annual basis. If you have plenty of savings and your personal belongings and home are reasonably easy to replace, this insurance coverage could be right for you.

On the other hand, knowing your home and personal property will be entirely replaced adds peace of mind. Replacement Cost Home Insurance is more expensive. Ask yourself if higher premiums make more sense than paying out of pocket for any upgrades to replace your home or property. In that case, the added yearly expense may be a more comfortable decision for you.

A computer with receipts next to it.

Pros and Cons of Actual Cash Value Home Insurance


If lower costs are your main objective, Actual Cash Value insurance is likely a safe choice. If you live in a newer home, and most of your fixtures and systems are standard in the market, the payout for damage, theft, or loss will be adequate. The savings you gain in annual policy costs may equal your out-of-pocket expenses to replace items.


 Actual Cash Value Insurance offers less incentive as your home and personal property age. The money you save on your policy will not be sufficient if your property’s fair market value is significantly reduced over time.

Pros and Cons of Replacement Value Home Insurance


When filing a claim for loss, you can expect to replace the item with a brand new version. Keeping an excellent inventory of your personal property, along with receipts and photos, will come in handy. If your home has upgraded features or contains custom details, your claim becomes smoother with better inventory.


Replacement Value insurance is more expensive. Having a serious discussion with your insurance agent will help you clarify if this additional expense is right for you.

When choosing life and property insurance, you should consider future needs. Remember that Homeowner’s Insurance covers your home, not the land value. Your local Independent Insurance Associates agents will be happy to make suggestions to ensure security for every circumstance. If you have expensive art and jewelry, you may need a separate endorsement to provide the extra coverage you need. Contact us today to discuss your current policy to confirm you have the most suitable protection for your budget and needs.