If you're stepping into the world of insurance for the first time, you're probably feeling a little bit overwhelmed. At first, buying home insurance may seem like a simple task, but it doesn't take long for most homeowners to realize that there's more to it than meets the eye.

For starters, there are several terms that you need to familiarize yourself with, some of which include actual cash value and replacement cost. Many homeowners have strong opinions about the actual cash value vs replacement cost debate for various reasons, ranging from the price to the levels of coverage.

If you're unfamiliar with these terms, that's ok! Our team of advisors has put together this article to help settle the replacement cost vs actual cash value debate once and for all.

Continue reading to learn more about the differences between ACV insurance and replacement cost coverage.

What is actual cash value and how does it work?

Actual cash value is a calculation used by insurance companies to determine the level of compensation that policyholders receive after they make a claim.

When you have actual cash value insurance coverage, your payout will be equal to the value of the insured item on today's market. To be clear, actual cash value coverage does not reimburse the original value of an insured item. Instead, it reimburses the value of an item of similar age and quality.

Most insurance companies use depreciation tables and other sophisticated tools to determine the actual cash value of an insured item. Many insurance companies also work with experienced appraisers for niche items that require additional assistance.

Actual cash value example

Here's a simple example to show you how actual cash value works:

You bought a high-end TV four years ago for $800. One day, a visitor accidentally knocks over a candle, which starts a fire in your living room. Afterwards, you realize that your TV has been destroyed by the fire. 

If your home insurance policy covers the actual cash value of your belongings, then you will be reimbursed for the cost of a four-year-old TV of similar quality. After doing research and contacting an appraiser, your insurance company determines that your TV was worth $400 prior to the event. In turn, you are reimbursed for $400.

What is replacement value insurance coverage and how does it work?

Like actual cash value, replacement cost is a calculation that insurance carriers use to determine the compensation that a policyholder receives after making a claim.

However, unlike actual cash value, if your home insurance policy covers the replacement cost of your items, then your payout will be equal to the value of a new item of similar quality. Having replacement cost coverage allows you to ignore the item's depreciation and replace your belongings (after they've been damaged by an insured risk or peril) without bearing any additional costs.

Replacement cost coverage gives homeowners confidence, as it helps them get back into the same comfortable position that they were in prior to the event.

Replacement cost coverage example

Let's rewind a bit and go back to our previous example:

If your home insurance policy covers the replacement cost of your belongings, then your insurance company will reimburse you for the value of a brand new item of equal quality (regardless of how old the item is).

So, if the same style of TV is currently being sold for $1000, your insurance company will give you $1000 for a replacement (which, in this case, is more than you initially paid for the item).

*Please note that these are basic examples. For more information on accurate, up-to-date quotes, pricing, claims, etc. speak to a licensed Surex advisor.*

What's the cost difference between actual cash value and replacement cost coverage?

Replacement cost coverage is more expensive due to the fact that it offers more extensive coverage.

Unfortunately, we can't tell you precisely how much it costs. The exact price of your actual cash value or replacement will depend on a number of variables, including your location, provider and claim history.

Homeowners should take this factor into account before making a final decision.

Want to save on home insurance?

Owning a home in Canada is more expensive than ever before, so why should you overpay for your home insurance? At Surex, we want to pass the savings on to you. How do we offer such cheap home insurance quotes? It's easy!

We work with Canada's best home insurance providers to get the inside scoop on the latest deals and home insurance discounts. Leveraging our working relationship with our partners allows us to provide Canadians, like you, some of the most competitive home insurance quotes on the market.

Not to mention, we do our best to take customer service to a whole new level. We do this by permanently matching you with an experienced insurance advisor. This means that every time you call, you get to speak to the same person (no call centres, no robots!).

Contact us today to receive up to ten home insurance quotes (the number of quotes varies by province) and learn how we can help you save up to 25% on home insurance by bundling your policies with one of our respected providers.

Are there items that aren't covered by actual cash value or replacement cost coverage?

Yes, in most cases, you will want to speak with your insurance provider or a Surex insurance advisor if you want to protect the following valuables:

• Art
• Collectables
• Memorabilia
• Antiques
• Family heirlooms
• Items with sentimental value

Speaking with an insurance expert will give you a better idea as to how you can go about protecting your precious belongings and keepsakes from events that may occur in the future.

Want to learn more?

If you're like us, you love to learn about anything insurance-related. That's why our advisors are always happy to answer your home insurance questions. Whether you have a question about your current policy or are shopping for insurance for the first time, we've got you covered.

Call or click today to contact one of our experienced team members!