When a property insurance policy pays a claim, it uses one of two methods to decide how much to pay: actual cash value or replacement cost. The difference can be significant.
Actual cash value (ACV):
- Pays what the damaged or stolen item is worth today — its replacement cost minus depreciation for age and wear.
- Example: a 10-year-old television is reimbursed at its current used value, not what a new one costs.
- Results in a lower payout, and usually a lower premium.
Replacement cost (RCV):
- Pays what it costs to replace the item with a new one of similar kind and quality, without subtracting depreciation.
- Example: that 10-year-old television is reimbursed at the price of a comparable new one.
- Results in a higher payout, and usually a higher premium.
Why it matters: after a major loss, ACV coverage can leave a real gap between what you receive and what it costs to actually replace your belongings or rebuild. Replacement cost coverage costs more up front but is far more valuable when you file a claim.
Check your policy: a policy can use different methods for the dwelling versus personal property. Knowing which applies helps you choose the right level of coverage. See what property insurance RMO offers.