Actual Cash Value Versus Replacement Cost Value

Trying to understand renters or homeowners insurance can be difficult if the concepts are new. One of the most frequently asked questions we get is, “How do insurance companies know how much my stuff is worth?”

Why you want replacement cost

Whether we’re talking about priceless family heirlooms or the everyday belongings you use to perform daily functions of living, everything in your home has some type of value.

In the insurance world, the calculation of this value is commonly referred to as RCV (Replacement Cost Value) or ACV (Actual Cash Value). The way these values are calculated will determine what you’ll be able to get to replace the item in case of a loss.

*These classifications refer to personal property and contents coverage – meaning, the items you own in your home or rental.

Original policies typically used ACV calculations, but as you know, items depreciate in their value over time. If you bought a laptop in 2017 that was worth $1500, your use and the age of the technology means that laptop won’t be worth $1500 in 2020, even though you would technically pay the same amount of money to get a new laptop of a similar caliber. Because ACV can’t always replace customer belongings at cost, it’s important to be able to know your belongings will be recovered in the event of a loss.

Note that these calculations refer to the “pre-loss” condition of an item – meaning, what was the item worth, with or without depreciation, before the loss occurred? A damaged item is no good for anyone, so any calculation addresses the item in its pre-loss state.

Replacement value definition

With replacement cost, the policy is going to pay for your loss without a deduction for depreciation – essentially, on the basis of replacement at the time of the loss. This is the TOTL cost to repair or replace and requires your coverage to be at least 80% of the cost of the replacement. The value of the property is determined when the loss happens. In a nutshell, replacement cost value (RCV) refers to how much it actually costs to provide a complete replacement of an item. This calculation does NOT factor in depreciation.

Does this mean more insurance coverage? Yes. When items are totaled using depreciation, obviously the cost to replace the item decreases. The RCV means it’ll cost more to replace the item, so including this calculation may mean you need to have a higher amount of coverage.

Actual cash value definition

This is when the policy pays for the cost to replace or repair property that’s damaged at the time a loss happens. Whether we’re talking about home or renters, actual cash value (ACV) refers to the amount of the total value of the item MINUS depreciation. The easiest way to think of it is to calculate how much the item could fairly be sold for (i.e., its market value). This is almost always going to be less than the original value of the item when you first bought it. The fine print is always in the policy, and working with us to make sure you understand that fine print is key to being in the know about how you’re protected and what you can expect in the event of various loss scenarios.

Additionally, you very likely won’t need to replace the ENTIRETY of your property in the event of a loss, but your structures. The property itself will still stand, and property values are assessed based on more than just the existing structures (land, land size, proximity to municipal features, etc.)

When an Insurance Policy Covers Replacement Value

Many consumers look at the coverage limits in their policies and believe this is the total amount they’ll receive from an insurance company in the event of a loss.

This isn’t always the case – the numbers on your policy refer to the TOTAL amount of insurance you have available for claims, not what you’ll receive for any one claim. Long story short, the numbers you see on your policy are the maximums that will be paid out.

This does not mean the insurance company won’t pay out disaster claims when there’s a total loss, or something disastrous happens. It just means that insurance companies want to understand the extent of the damage before you’ll receive payment on your items.

When we work with clients on building policies, we recommend replacing items at replacement cost value. This will allow you to replace any items that are damaged and result in a loss. When you get your quote, we’ll talk to you about your situation and how replacing at RCV or ACV will affect your policy.

How is actual cash value determined by insurance companies?

The calculation looks like this:

Replacement cost – depreciation = ACTUAL CASH VALUE


Understanding the expected life span of an item and determining what percentage of that span remains calculates DEPRECIATION. For example, if you bought a TV three years ago for $1000 that has a five-year expected life span, the TV has depreciated by $600, or the ACV would now be $400.


How do insurance companies know how much things cost? They have endless access to market data sources that offer some idea, but you also work with us when you first get your policy set up to itemize your belongings and assign a total value. We work with you to make sure these amounts are in-line with market data, then they are able to calculate average depreciation value to have a better idea of what you should be compensated for if we use an ACV calculation.

We work with our clients to help assess which calculation would be better for their individual needs. 9 out of 10 times, we’ll use the RCV (Replacement cost value) calculation to make sure our customers are able to fully replace their items at as close to cost as possible in the event of an emergency or loss.

If you’re looking for homeowners or renters insurance, we’d love to chat with you about your items and how we can best get you set up with a policy that meets your individual needs. Fill out our quick and easy quote form, and we’ll come back with competitive rates across a network of carriers that meet your personal needs. We’d love to help you!



We always recommend adding a replacement code endorsement to your personal/property contents coverage. Any agent you’re talking to about a policy can help you do that, and we’re glad to help explain more about how RCV works and run quotes for you that correlate. We add the replacement cost endorsement to all our customer policies. This allows our policyholders to take advantage of replacing property without needing to account for depreciation costs.

Remember to talk to us if you’re insuring high-value property contents, such as priceless art, firearms, heirlooms or expensive jewelry. If the need arises, we may be able to come up with separate scenarios that will better assist you in insuring those items if needed.