Replacement Cost vs. Actual Cash Value: Which Should Your Home Policy Have?
Learning goal: Work out what a claim would pay under replacement cost and actual cash value settlement, and check which one your policy uses for the house, the roof and your belongings.
Short answer
Replacement cost coverage pays to repair or replace damaged property at today's prices, minus your deductible. Actual cash value pays replacement cost minus depreciation, so older items and roofs get much less. The Texas regulator recommends replacement cost to be fully protected. A policy can use different methods for the house, the roof and belongings.
Read to the end to complete this lesson.
On this page
The Fuller Picture
How a policy settles a claim matters as much as its limit. The Texas Department of Insurance's example: a 10-year-old roof costs $10,000 to replace. With replacement cost and a $2,000 deductible, the insurer pays $8,000. With actual cash value, the roof might be worth $7,000, so after the deductible the insurer pays $5,000 and you pay $5,000. Replacement cost usually costs more in premium; check each part of your policy.
Key Takeaways
- Texas Department of Insurance: "To be fully protected, make sure your policy has replacement cost coverage."
- Actual cash value "pays replacement cost minus depreciation," the decrease in value from wear and age.
- In TDI's roof example, you'd pay $5,000 out of pocket under actual cash value, compared with $2,000 under replacement cost.
- A policy may pay replacement cost on the house but actual cash value on the roof or on belongings, so read each section.
- Under some replacement cost policies, the insurer first pays actual cash value and pays the rest (recoverable depreciation) after repairs are done.
Real-World Example
Marcus
Marcus compares two quotes for his first home. One settles the roof at replacement cost; the cheaper one settles roofs over a certain age at actual cash value. His roof is 12 years old. Working through TDI's example, he sees that a storm-damaged roof could leave him paying thousands more on the cheaper policy, so he asks how much the premium difference is and chooses based on what he could afford to pay after a storm.
Common Mistakes
- Comparing premiums without checking how claims are settled.
- Assuming replacement cost on the house means replacement cost on the roof and belongings too.
- Not keeping receipts and photos, which help prove what items cost and when they were bought.
- Missing the deadline to finish repairs and claim recoverable depreciation.
Interactive Exercise
Run the Numbers on Your Own Roof
Use TDI's method with your own roof age and a rough replacement price to see what each settlement type would pay.
Tick each step as you do it. Your checklist is saved in this browser.
Knowledge Check
Question: A roof costs $10,000 to replace and its actual cash value is $7,000. The deductible is $2,000. What would an actual cash value policy pay?
Recommended Insurpedia Tools
- Deductible Calculator: Enter a claim amount, deductible and coverage limit for a worked example of how a covered claim splits between you and the insurer. It does not read your policy or estimate premiums.
- Coverage Builder: Answer a few questions about your home, vehicles, family and work, and see insurance topics worth researching for your situation, each linked to a plain-English explanation. It doesn’t tell you what to buy.
Related Insurance Terms
Related Scenarios
Questions to explore next
Questions readers often ask next about this topic:
- Does my policy settle the roof at replacement cost or actual cash value?
- How does my insurer depreciate roofs?
- How long do I have to finish repairs to claim recoverable depreciation?
- What would replacement cost on my belongings add to the premium?
See every lesson in the Homeowners Insurance course.
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The factual claims on this page were checked against these sources. Rules and figures change, so check the source itself if you need to confirm the current version.
- tdi.texas.govHome insurance guide · Texas Department of Insurance
Educational information, not advice: This lesson is for general education only, not legal, financial, or insurance advice. Actual coverage, discounts, and requirements depend on your policy’s wording, your insurer, and the laws of your state. Confirm specifics with your own insurer or a licensed agent before making a decision. Insurpedia does not sell insurance and does not recommend specific insurers. The definitions, the recommendation and the roof example are from the Texas Department of Insurance's home insurance guide. How a policy settles claims, and how it depreciates property, depends on the policy and the insurer. Educational information, not advice on your policy.