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What is Actual Cash Value (ACV) vs Replacement Cost in Home Insurance?

Actual Cash Value vs Replacement Cost

When you buy insurance, you often are offered the option between actual cash value and replacement cost. BEWARE! While the actual cash value option will be cheaper, it means your stuff will be drastically under-insured in a loss.

Actual Cash Value means if your personal stuff gets destroyed or stolen, you will only be refunded the used value of your property (often called the depreciated value).

Example: You have a big couch that you bought for $3,000 five years ago. It get’s destroyed in a fire, and the insurance company says the average life of this type of couch is 10 years. They say they will only pay you $1,500 for this couch because it had 5 useful years remaining. (1/2 the value to buy a new couch)

So basically, you got back…. half a couch

confused what is this? GIF

Replacement Cost means your stolen or damaged stuff will get replaced like new. A full replacement, restoring your stuff back to its original condition. In the above example, you will get the full $3,000 for the couch.

Young Alfred never recommends you choose Actual Cash Value in your home insurance policy and always quotes home insurance policies with Replacement Cost. It’s what you need.

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