Difference Between Cash Value & Replacement Cost Insurance Coverages in the United States

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What is the difference between cash value insurance coverage and replacement cost insurance coverage in the United States?

It’s so easy to get confused if you are looking at all the insurance terminologies on the surface level, especially if you aren’t an insurance professional or don’t have vast knowledge in the industry.

The very essence of learning some of these terms is to help you overcome some of the challenges policyholders face in the insurance industry where they easily misunderstand simple terms while reviewing their policies.

If you are one of those policyholders asking agents what the difference between cash value and replacement cost in homeowners insurance is, we’ve got you covered.


What’s the difference between cash value vs. replacement cost in homeowners insurance?

1. Cash value insurance coverage 

Cash value insurance coverage is the cost of the item minus depreciation. What does cash value in homeowners insurance in the U.S. mean?

Cash value insurance coverage means that if your house is destroyed by fire or a thief broke into your house and stole your desktop computer, you will only be paid the cost of your house or desktop computer less depreciation.

Cash value insurance coverage is so terrible that your homeowners claim might not be enough to rebuild your house or replace the desktop computer when compared to its current market value. For you to replace it, you must spend from your own savings.

How is actual cash value calculated? It’s calculated by subtracting the depreciation from the replacement cost.

2. Replacement cost insurance coverage

Just like the name “replacement” implies, replacement cost insurance coverage will pay homeowner policyholders, the full cost of rebuilding their house or replacing their desktop computer or any other item that was stolen. They pay in full with an amount equal to the current marketplace value without removing any depreciation.

Even though most homeowners insurance quotes you get today online and from agents come as “replacement cost” by default, it’s always a good idea to check to be sure. 

Having replacement cost insurance coverage in your homeowners policy doesn’t mean that all the i’s are dotted and t’s are crossed. You will need to review your policy limits with your reliable insurance agent near you regularly to be sure they are sufficient for your needs.

Replacement cost insurance coverage in homeowners

There’s a third, less-common option called guaranteed or extended replacement cost. The Insurance Information Institute explains:

This policy offers the highest level of protection. A guaranteed replacement cost policy pays whatever it costs to rebuild your home as it was before the fire or other disaster–even if it exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally won’t cover the cost of upgrading the house to comply with current building codes. You can, however, get an endorsement (or an addition to) your policy called Ordinance or Law to help pay for these additional costs. A guaranteed replacement cost policy may not be available if you own an older home.


At what time is actual cash insurance coverage better than replacement cost insurance coverage? Only when you want to insure a vacation home to save cost.

Is replacement cost or cash value better?

Replacement cost is a better homeowner insurance coverage option than the actual cash value because it restores the policyholder’s situation to what it was before the covered loss occurred. The extra protection replacement cost provides makes it a better alternative.

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