Home insurance typically covers your losses in one of two ways: by insuring your property for its replacement cost or its actual cash value. But neither of these are the same as your home’s market value. Understanding the difference between these three ways of estimating your home’s worth is key to making sure you have the right amount of coverage for your home.

The difference between replacement cost vs. actual cash value

In homeowners insurance, replacement cost and actual cash value are different methods for determining the value of your property. A replacement cost valuation means your insurance company pays what it would cost to replace the materials used in the construction of your home or rebuild it entirely using current prices, minus your deductible. 

Actual cash value (ACV) is different. It accounts for depreciation to determine the value of your home. Some items lose value over time, often due to wear and tear. A policy based on ACV takes the reduction in value into consideration, so it may pay less in a loss when compared to one based on replacement cost value.

Knowing the difference between replacement cost and actual cash value can help you decide if you’re getting a good deal. ACV policies are often less expensive, but they don’t provide as much coverage in a loss. And imagine learning that tidbit when you have to file an insurance claim!

That said, insuring some items for their actual cash value may be the best way to get coverage. For instance, homes with older roofs can be difficult to insure. Opting for a roof surfacing replacement schedule endorsement that covers your roof according to a specific schedule in certain claims can help.

What is market value?

Your home’s market value is different from both replacement value and actual cash value. It refers to the amount your home might sell for depending on market conditions. 

Market value factors in your home, additional building structures, and the land on which they were built. Your land is valuable, but it's usually not at serious risk of loss, so a standard home insurance policy doesn't account for it. Sinkhole insurance may be an exception depending on your state. It can account for damage the land itself experiences after ground cover collapse.

The market value also includes intangible factors that influence the price of your home: its location, neighborhood, proximity to good schools, and commutability to work locations. These can increase or decrease the value of your home when you sell it, but they don't impact how much it should cost to cover your home against damage. 

Calculating replacement cost value

At Kin, we evaluate the various features and characteristics of your home to determine its replacement cost value, such as the:

• Type of walls.

• Square footage.

• Number of corners.

• Building materials.

• Overall quality of your home with specific attention given to kitchens and bathrooms.

We also look at the cost of construction at the time you’re applying for coverage. Once we crunch the numbers, we generate a replacement cost estimate (RCE) of your home. The RCE reflects how much it would cost to replace your entire home with the similar materials today.

Moreover, we regularly recalculate RCEs in case there are any changes in the marketplace. This helps ensure that our premiums are fair and accurate, and that your home is adequately protected.

Keep in mind that the replacement cost is different from the market value of the home which can be higher or lower than the cost to rebuild it.

Is replacement cost insurance enough?

The cost to rebuild your home may be more than the market value or purchase price, depending on when you purchased the home, current property values, inflation, and other factors. That's because it can cost more to rebuild a home from scratch, especially after a local disaster that may drive up labor and material costs. 

As economic recessions in the past have demonstrated, it’s possible for the cost of raw materials and fuel to rise even as property values fall. Global economic conditions can also impact domestic construction prices. Even if the US is in a housing slump and construction is at a standstill, construction may be booming in other countries and driving up the cost of materials. 

A home’s replacement cost and its market value are usually close during good economic conditions. However, you shouldn't be alarmed if your replacement cost is slightly higher than your home purchase price, especially if you bought your home a while ago. Replacement costs should reflect the current market – otherwise you wouldn’t have enough coverage to pay for a full rebuild after a catastrophe.

Dealing with the aftermath of a catastrophic event is difficult enough without worrying about the cost of rebuilding your home. That’s why a good provider will make sure your home and additional structures are insured accurately.

Even with the annual updating of the replacement cost estimate, there may be instances when the home is underinsured. This can happen when the cost of building materials or supplies spike, as lumber did in 2021, or when new ordinances cause the rebuilding to be more expensive. 

Kin members can protect against this situation by adding an endorsement to their policies called a Specified Additional Amount of Insurance for Coverage A. It creates a "cushion" in case you have a total loss where unforeseen circumstances push the cost of a replacement over the amount provided in your dwelling coverage.

Calculating actual cash value

While a replacement cost valuation is based on what you would have to pay to rebuild your home in today’s market conditions, actual cash value (ACV) is the cost to rebuild your home minus depreciation. Depreciation is the amount of value your home loses over time due to age or wear and tear.

If your policy insures your home and personal property for its actual cash value and you experience a loss, then it’s helpful to have receipts for your items as well as their make and model. That way, you have a better chance at getting a reasonable payout when the claims adjuster determines the actual cash value of the damaged items.

What if I don’t agree with the ACV?

You can dispute the adjuster’s assessment of the value of your damaged items, but you’ll need documented proof to strengthen your case. A good way to do this is to take a home inventory before you even get insured. Not only can that help should you have a claim, but it gives a better idea of how much personal property insurance you need.  

If you don’t have any way of showing what your personal property is worth, then the adjuster or your insurance company will offer their best estimate of the value of the items you have lost. 

How much should you insure your house for?

Choosing the right valuation method depends on your objectives. If you want an easier time replacing lost or damaged items or rebuilding your home, replacement cost coverage is the clear winner. Though it costs a little more, this type of coverage offers you the means to return your home to its pre-loss condition, without deducting for depreciation.

Your home’s replacement cost coverage should account for:

• Local construction costs

• The structure’s total square footage (not including the land)

• The home’s exterior construction (e.g., frame, masonry, or veneer)

• The home’s style (e.g., Cape Cod, ranch, contemporary, or Victorian)

• Total bathrooms and rooms

• Roof type and materials

• Renovations to the home and unique features (e.g., arched doorways and fireplaces)

• Other structures, such as garages, greenhouses, fences, and sheds

On the other hand, home insurance based on your property’s actual cash value can be less expensive. That may be the right choice if you’re on a tight budget. However, you should know that you may not get enough to rebuild your home to its pre-loss condition if you experience a loss.