What Is Replacement Cost Home Insurance? 

As a home insurance consumer, you have reimbursement choices. How do you want your policy to pay you if your home or possessions are ruined? Replacement cost value (RCV) home insurance is one of your choices. 

Replacement cost home insurance can be expensive. If something terrible happens, you may be thankful for your generous policy that could make you whole again with few out-of-pocket costs. 

What Is Replacement Cost Insurance?

RCV policies provide the funds you’ll need to repair your home at today’s building prices or replace your covered belongings at today’s cost with a similar product.[1]

Market value is what a buyer would pay for your home today. It takes into consideration factors such as its location, the current housing market and what nearby homes are selling for. Replacement value is what it would cost to build it from the ground up. 

A replacement cost is a measurement of how much it will cost to fix damage at today’s prices. It could be higher or lower than your home’s market value. 

How Replacement Cost Coverage Works 

Structural damage is typically assessed via replacement cost coverage.[1] If a fire burns through your kitchen wall, an assessor will determine how much rebuilding that wall will cost. 

To calculate replacement cost, companies typically evaluate your home’s age, square footage, and current building materials. Your market’s associated costs for materials and labor matter too. 

Older homes typically have modified replacement cost coverage.[2] Because finding antique materials can raise project costs, companies simply agree to cover repairs made with modern materials. If you have a kitchen fire that destroys a lathe-and-plaster wall, your company may authorize payment for drywall repair instead. Some insurers may require your home to meet specific criteria to qualify for RCV insurance. 

What Is Actual Cash Value (ACV) Home Insurance?

Some home insurance policies use a home’s actual cash value when determining appropriate payouts.[3] 

Under an ACV policy, the insurance company begins with the costs required to repair damage or replace items.[4] But the item’s depreciation (or how much value it’s lost through age or wear and tear) is subtracted from your potential payout. 

ACV plans typically have smaller settlements than RCV versions. Depreciation, especially on very old items, can take a big chunk out of the payments a company might offer. However, ACV plans come with smaller monthly premiums, so they can be an attractive choice for budget-conscious consumers. 

Advantages & Disadvantages of Replacement Cost 

Should you buy an RCV plan to cover your home? Understanding the pros and cons can help you make a smart decision. 

RCV is a different way of calculating a payout that usually results in a bigger check. If you must file a claim, you’ll get more back with this type of insurance. 

RCV drawbacks include increased costs. This type of insurance offers comprehensive coverage for your home and belongings. Expect a larger premium as a result. 

Understanding Your Policy 

While replacement cost home insurance is designed to help you recover from large and difficult claims, it’s important to read your policy carefully. 

Most RCV plans include coverage limits. If the damage to your home is so large that you need more than the plan will pay, you may need something called an endorsement. These riders cover a larger percentage of damages and/or provide protection for items and situations that may not be covered under your primary homeowners policy.

Some homeowners use guaranteed replacement riders to help pay for a total home rebuild or replacement, even if the final price tag is higher than the insurance coverage limit of your main homeowners policy. A plan like this could protect you if your home’s rebuild is complicated or just very expensive. 

No matter what type of policy you have or riders you use, documentation is critical. Keep a copy of your policy in a safe place, and complete a detailed home inventory before a crisis occurs. If you must file a claim, you’ll have the research and backup to prove how much the company should pay. 

Should You Buy Replacement Cost Home Insurance?

Every home (and homeowner) is different. Ask your potential insurance company about what an RCV plan would cost, especially when compared to your other options. You could find that this type of coverage is best for you and your home.