Replacement Cost vs. Actual Cash Value: Which to Choose

Replacement cost coverage pays what it costs today to buy new items of like kind and quality, while actual cash value (ACV) coverage pays that cost minus depreciation, the drop in value from age and wear. Replacement cost is the better choice if you would rebuy your furniture, electronics, and clothing after a fire or theft. The Insurance Information Institute estimates it adds about 10 percent to the premium, or about $17 a year on the 2023 national average of $173, and on a large claim for belongings a few years old it can pay thousands of dollars more. Many replacement cost policies pay the ACV first and the rest only after you replace the items.

How each option pays the same claim

Example: a kitchen fire destroys four items, and your deductible is $500. The insurer's adjuster estimates what each would cost to replace new and how much value each has lost to age and condition:

• Actual cash value policy: pays the $3,000 ACV minus the $500 deductible, or $2,500. Replacing everything at today's prices would cost you $3,500 more out of pocket.
• Replacement cost policy: pays $6,000 minus the $500 deductible, or $5,500, once you replace everything: $2,500 at first and the $3,000 held back after you send receipts.

"Like kind and quality" means a comparable item at today's price, such as a current television of the same size and type, not an upgraded model.

The $3,000 difference is the depreciation. The older your belongings, the more depreciation the adjuster subtracts, while the price of a new replacement does not depend on how old your item was.

The insurer decides how much to depreciate each item based on its age and condition. Ask the adjuster for an itemized list and question any amount that looks high. If you still disagree, the National Association of Insurance Commissioners (NAIC) suggests checking your policy for an appraisal clause, and your state insurance department can help you work through the dispute with the insurer.

How the replacement cost holdback is paid

The amount held back is the depreciation on each item, and claim paperwork may call it "recoverable depreciation." The steps:

1. File the claim with a list of what was lost, including each item's age and what you paid where you know it. A home inventory made before a loss makes this faster.
2. Collect the first payment, the ACV minus your deductible: $2,500 in the example.
3. Replace the items and keep every receipt.
4. Send the receipts to the insurer, which releases up to the held-back amount for each item based on what you actually spend on eligible replacements. If you replace only the sofa and the laptop at their estimated replacement costs, you collect their $1,600 ($900 plus $700), and the rest stays unpaid. Buying cheaper replacements can reduce that payment.
5. Watch the deadline. Check the loss settlement section or the replacement cost endorsement for any time limit on replacing items and claiming the rest, and ask the adjuster to confirm it in writing.

How to file a renters insurance claim covers the rest of the process, from reporting the loss to working with the adjuster.

What replacement cost adds to your premium

The 10 percent figure is an estimate from the Insurance Information Institute, an industry group, so ask each insurer to quote the same policy both ways to see its actual price. On a $200 quote, 10 percent is $20 a year; in the example above, the upgrade paid $3,000 more on a single claim. How to compare renters insurance quotes covers matching the other terms, and how much renters insurance costs lists average premiums by state.

Check your current policy before you pay for the upgrade. Look on the declarations page, the summary page of your policy, for "replacement cost" in the loss settlement terms or in the list of endorsements. If it is not there, the NAIC notes that you can add a personal property replacement cost endorsement.

When actual cash value can make sense

ACV costs less, and the Texas Department of Insurance notes that it also pays less when you have a claim. It can be enough in two situations:

• You would take the cash instead of replacing what you lose. A replacement cost policy releases the held-back amount only for items you replace, so if you would not rebuy, you would collect about the same ACV under either policy.
• Most of what you own is new. Depreciation on recent purchases is small, so the two payouts start close together. The gap grows every year as the items age, so recheck your choice at renewal.

Either way, the payout cannot exceed your personal property limit, and special dollar limits on items such as jewelry still apply. Because replacement cost pays full new prices, set your limit at what it would cost to replace everything you own; how much personal property coverage you need shows how to total it.

For what the rest of a renters policy covers, see what renters insurance covers.