Actual Cash Value vs. Replacement Cost: What’s the Difference in Homeowners Insurance?

By the Mercury Team

If your home or personal belongings are damaged or stolen, how much will your insurance actually cover? The answer depends on the type of coverage you selected. Specifically, whether your policy includes actual cash value (ACV) or replacement cost value (RCV). These are two of the most common homeowners insurance coverage types, and understanding the difference between them can help you avoid surprises when it’s time to file a claim.

Let’s break down how ACV and RCV work, highlight their pros and cons, and help you decide which option might be the best fit for your needs and budget.

What Is Actual Cash Value (ACV)?

Actual cash value (ACV) is the amount your item is worth today after accounting for depreciation. Your insurance company looks at what it would cost to replace the item with a similar one, then subtracts value for age, wear and tear, and overall condition.

“Actual cash value is basically what it sounds like. It’s what your personal property is worth at the time of your loss, so the cost to repair or replace the property less depreciation,” said Mercury Vice President of Property Claims Bonnie Lee. “Depreciation rates vary depending on the type, age, and condition of property, but you can rest assured that we do our best to make sure our customers are properly compensated so they can resume their regular lifestyle as quickly as possible.”

Calculation

ACV = Replacement Cost - Depreciation

Actual Cash Value Example

You bought a couch five years ago for $2,000. If you had to replace it today with a similar new model, the cost would still be $2,000. But since your couch is five years old, your insurance company applies depreciation based on age and use. Let’s say they determine it has 50% depreciation due to wear and tear.

Here’s the math:

• $2,000 (replacement cost) - $1,000 (50% depreciation) = $1,000 (ACV)

So, with ACV coverage, you’d receive $1,000 from your insurer. It’s not enough to buy a brand-new couch, but it’s enough to cover its current value.

Pros and Cons of ACV

Take a look at some of the pros and cons of ACV:

Pros	Cons
Less expensive than replacement cost coverage	Lower payouts since it’s based on depreciated value
Good for lower-value or easily replaced items	May not cover full replacement cost of new items
	Higher out-of-pocket costs for big-ticket items

Insurance Tip

Lee recommends keeping an inventory of your belongings and copies, scans, or photos of your receipts if you have an actual cash value policy.

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What Is Replacement Cost Value (RCV)?

Replacement cost value (RCV) is a type of homeowners insurance coverage that pays to repair or replace damaged or stolen items with brand-new ones of similar kind and quality without deducting for depreciation. This means you’ll receive enough to replace an item at today’s prices, not what it was worth after years of use.

Calculation

RCV = Full current market value of a new item

Replacement Cost Value Example

Let’s say your 5-year-old TV is stolen. You originally paid $1,200, but the current cost for a similar model is now $1,400.

If you have RCV coverage, your insurer would pay the full $1,400, so you can buy a brand-new replacement, even though your old one had depreciated in value.

“Chances are you might not be able to find the exact model of a TV that was purchased two years ago. With Replacement Cost coverage, you’ll be able to replace your old television with a newer model without having to absorb the cost of five years’ usage,” said Lee.

Keep in mind that some policies pay the actual cash value up front, then reimburse the rest after you replace the item and show proof (like a receipt).

Pros and Cons of RCV

Here are some of the pros and cons of RCV:

Pros	Cons
Covers the full cost of brand-new replacements	Higher premiums than ACV
Restores your home and belongings to pre-loss condition	May need to submit receipts or proof of replacement.
Great for valuable or hard-to-replace items.	May get partial payment up front, with the rest after replacement.

Insurance Tip

Lee recommends homeowners insurance policyholders review their coverage with their insurance agent annually.

“Our agents are diligent about explaining the ins and outs of insurance policies to customers, but homeowners should reach out to their agent to assess their coverage before a loss happens. One simple phone call could end up saving you thousands of dollars, especially if you’ve acquired new belongings or made home renovations,” said Lee.

Actual Cash Value vs. Replacement Cost: Key Differences

Not sure which coverage is right for you? Here’s a side-by-side look at the main differences between ACV and replacement cost.

Feature	Actual Cash Value (ACV)	Replacement Cost Value (RCV)
Depreciation deducted?	Yes, payout is reduced based on age and condition	No, you’re reimbursed the full cost of a new item
Payout type	Used or depreciated value	Full cost of a brand-new replacement
Premium type	Lower—more affordable monthly payments	Higher—more expensive, but offers fuller protection
Ideal for	Budget-conscious homeowners or those with older items	Homeowners who want full value back after a loss
Claim process	One-step—payout issued once claim is approved	Two-step—initial ACV paid, then remaining balance after proof of replacement

Which Coverage Should You Choose?

Deciding between ACV and RCV comes down to your personal situation and what kind of protection you’re looking for. Here are a few things to consider:

• Your budget: ACV coverage typically comes with lower premiums, which can be easier on your wallet month-to-month.
• The value of your belongings: If you own newer or high-value items, RCV might offer better peace of mind.
• Your comfort with risk: ACV means you could pay more out of pocket to replace things after a loss.
• Current replacement costs: Can you afford to replace your belongings at today’s prices if you’re only reimbursed for their depreciated value?

Most home insurance policies automatically cover the structure of your home at replacement cost. But your personal belongings—e.g., furniture, clothes, or electronics—might only be covered at ACV unless you’ve chosen otherwise.

If you’re not sure what your policy includes, check in with your insurance agent. A quick conversation can help you understand your options and make sure your coverage still fits your needs, especially if you’ve made upgrades or brought home some new valuables.

Frequently Asked Questions

Here are some frequently asked questions about ACV and RCV.

What is the difference between ACV and replacement value?

ACV deducts for depreciation, so you’ll be reimbursed for what your item is worth today, not what it costs to replace. RCV covers the full cost to buy a new item of similar kind and quality, without factoring in depreciation.

Can I upgrade from ACV to RCV?

Yes! If you’re currently on an ACV policy and want the added protection of full replacement cost, just reach out to your insurance agent. They can walk you through your options and help adjust your coverage to better match your needs.

Why does RCV often cost more?

RCV gives you more protection. Since it pays for brand-new replacements, your insurance company is taking on more of the cost, which is why the premium is usually a bit higher.

Does Mercury Insurance offer both options?

Yes. Mercury offers both ACV and RCV coverage, so you can choose what works best for your home and budget. If you’re unsure which one’s the better fit, a Mercury agent can help you make the right call.

Conclusion

When it comes to choosing between ACV and RCV to protect your belongings, there’s no right or wrong answer. The correct choice depends on your needs, budget, and how much risk you’re comfortable taking on.

If you’re shopping for cheap home insurance that still protects what matters most, Mercury has options that fit your needs. Whether you’re reviewing an existing policy or starting fresh, a quick chat with a Mercury agent can help properly insure your home and everything in it.

Contact us today for a fast, free quote!