Replacement Cost

What Does Replacement Cost Mean?

Replacement cost refers to the amount of money needed to replace a piece of property without accounting for depreciation. In the context of property insurance, the replacement cost can determine the payout amount an insurer will provide to a policyholder to settle a claim.

Replacement cost is synonymous with replacement value.

Insuranceopedia Explains Replacement Cost

Some property insurance policies cover the full replacement cost of an insured item, while others may only cover the actual cash value. The actual cash value takes depreciation into account, reflecting the value of an item after considering factors like wear and tear and age, which can significantly reduce its worth. For instance, a car begins to depreciate as soon as it is driven off the lot following the sale. A policyholder who still owes money on an auto loan may find that the actual cash value payout after a total loss is less than the remaining loan balance, which is the kind of shortfall that standalone GAP insurance covers. Therefore, whether an item is insured for its replacement cost or its actual cash value can greatly impact the amount an insurer pays out to fulfill a valid claim.

For homeowners, replacement cost coverage is especially worth paying attention to when shopping for a policy, since it determines whether you can afford to rebuild or rebuy after a covered loss. You can compare how different insurers handle this in our guide to the best homeowners insurance companies.