What Does Replacement Cost Value Mean with Home Insurance? 

When it comes to home insurance, different policies offer varying degrees of compensation for a claim. You can choose what type of policy you want when you sign up for a home insurance policy. It is important to choose the type of policy suited for you, your compensation needs and your belongings. 

Actual Cash Value vs Replacement Cost Value 

There are two choices in home insurance policies when it comes to personal belongings coverage: actual cash value or replacement cost value. 

An actual cash value policy provides compensation for your lost or damaged belongings after accounting for depreciation. This means that as the value of your belongings goes down, or depreciates, so does the amount of compensation you may receive. For example, say you purchase a couch for $1,000. A few years later, the couch is destroyed in a fire after its value has depreciated to $700. Instead of receiving the full $1,000, you will receive closer to $700 for the couch. 

A replacement cost value, on the other hand, does not account for depreciation. In the case above, you would receive closer to $1,000 in order to replace your couch. This type of policy is relatively more expensive, but it may also help you more easily replace your damaged or destroyed items. 

Total Replacement Cost Value 

It is important to understand that actual cash value and replacement cost value for personal belongings are different than the total replacement cost value of your home. 

Total replacement cost value of a home instead refers to your dwelling. This is how much it would cost to completely rebuild the home after a disaster, including building and material costs. It is generally recommended that you carry enough home insurance to cover the total replacement cost value of your home. This is in part because of the 80% rule in home insurance.  

The 80% home insurance rule states that homeowners may be denied compensation for a claim if they are carrying less than 80% of their home’s total replacement cost value in home insurance. This is because the insurance provider will calculate your compensation based on how much insurance you should be carrying rather than how much insurance you currently have. For example, if damages to your home fall into range of what is covered under your policy, you may still be denied compensation if you are carrying less than 80% of your home’s total replacement cost value in home insurance.