How does replacement cost relate to actual cash value?

By: Contributors

Aside from protecting your home from theft, structural damage and personal liability, homeowners insurance also includes living expenses if you need to live elsewhere while your home is being repaired. Your personal contents, however, are the items you most likely will miss and will want to replace as quickly as possible. There are two options for insuring the contents of your home: replacement cost coverage and actual cash value coverage. Choosing the option that's right for you depends on your lifestyle and finances.

If you insure the contents of your home for actual cash value, in the case of theft, you will get the actual value of the items stolen, but with depreciation taken into account. So an old TV might be worth only a quarter of the price of a new TV. Therefore the money you can claim from the insurance company, while it is helpful, cannot cover the cost of buying the item brand-new. Since less money is being offered as compensation, insurance for actual cash value coverage is more affordable than replacement cost coverage. It's worthwhile to insure items for actual cash value only, if you don't necessarily care about the particular items and you can live without them comfortably.


Although replacement cost coverage is ten percent more expensive than actual cash value coverage, it's worth it when you have items that are integral to your lifestyle or are impossible to replace, such as complex electronic equipment, original artwork or expensive jewelry. Maintaining replacement coverage for electronic equipment is especially important since electronics get upgraded regularly, leaving old electronic equipment virtually worthless. When you insure your contents for replacement cost, you receive the current value of the item so that you can purchase a new replacement. If some unique items just cannot be replaced, at least you can take comfort in getting its value in monetary compensation.