Should I get replacement cost or actual cash value coverage for my property insurance?

Q:

I have two options for property insurance: replacement cost and actual cash value. Which one should I get?

A:

First, let's talk about the main difference between the two: actual cash value factors in depreciation, whereas replacement cost does not. As such, replacement cost can be thought of as a "more complete" coverage and is, therefore, more expensive.

The choice between replacement cost or actual cash value is usually a matter of affordability. If you can afford to purchase insurance on a replacement cost basis, it's usually recommended that you do so.

A second factor to look at is how depreciation affects the property you intend to insure. If the effects of depreciation are deemed to be negligible, then there may not be much need to purchase the more expensive replacement cost option since you may not be getting much more coverage for your higher premium.

A third factor to look at is whether your property has any value at all! For example, if you've just purchased a derelict home that you intend on tearing down to rebuild, you will want to insure it on an actual cash value basis because there is no point in getting replacement cost (see our Q&A on How Should I Insure a Vacant Building to learn more).

In summary, the decision boils down to affordability, depreciation, and value of the property. Your insurance agent or broker will be able to give you more detailed advice based on your particular set of circumstances (see What Is an Insurance Broker? to find out what they do and how they differ from insurance agents).

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View all questions from Jacques Wong.

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About the Author: (Director of Education at PNC Learning)

Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won Insurance Council of BC awards in 2015 and 2020 for academic excellence in the insurance licensing courses. He educates insurance professionals through PNC Learning and as a Thought Leader at ReFrame Insurance.

In his day job as an insurance broker, he helps businesses with creative risk management solutions and strategic advice when it comes to insurance.

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