Market Value vs. Replacement Cost vs. Actual Cash Value

If you’re in the market for homeowners insurance, a couple of questions are probably top of mind. One of the most common: how much coverage do you need?

In order to answer this question, you’ll need to consider a couple of different numbers that are sometimes confused for one another: Your home’s market value, its replacement cost, and its actual cash value. 

Below, we take a closer look at each of these terms to explain what they are, how they compare to each other, and how you can use each to settle on the right coverage levels for your homeowners insurance policy. 

What is market value?

Your home’s market value is essentially how much money you can sell it for in your local housing market. It includes the value of both your house, the land it sits on, and any additional structures on your property, such as a garage, gazebo, swimming pool, etc. 

Some factors that can influence your home’s market value include its:

• Age
• Square footage 
• Location
• Architectural style
• General complexity
• Building materials
• Local housing supply
• Presence or absence of other structures

Many people think that their home’s dwelling coverage is based on their home’s current market value. But the truth is that market value usually isn’t a consideration when insurance companies calculate your coverage limits. In fact, basing your dwelling coverage limits on market value could result in you being over- or underinsured, depending on a range of factors. 

Instead, insurance companies will typically calculate dwelling coverage limits based on your home’s replacement cost. 

What is replacement cost?

Your home’s replacement cost is the amount of money it would take to rebuild or repair your home today, using current codes, labor costs, and material costs. Often, this will be less than the home’s market value, though that isn’t always the case. 

Some factors that can affect your home’s replacement cost include:

• The home’s age
• The home’s square footage 
• The home’s architectural style
• Debris removal and/or demolition costs
• Availability of construction materials
• Local construction and labor costs
• Supply and demand of labor locally

Many homeowners insurance policies will automatically include dwelling coverage equal to the home’s replacement cost, which is calculated by the insurance carrier. That being said, certain components of your home — like your roof — may be covered at its actual cash value instead of its replacement cost.

What is actual cash value?

Actual cash value is the cost of repairing or replacing property that is stolen, damaged, or destroyed — minus any depreciation that may have occurred. In other words, it’s an estimate of how much money you could get for something if you were to sell it today, in its current condition vs. when it was brand new. 

In the context of dwelling coverage, actual cash value is rarely used. That being said, some policies will insure the roof at its actual cash value while insuring the rest of the dwelling at its replacement cost. 

Factors that can impact the actual cash value of your roof include:

• The roof’s age
• The roof’s condition
• The type of shingle 
• The roofing substructure
• Location and local weather patterns

Actual cash value is more often used in the context of personal property coverage — i.e., the items you keep in your home which are covered by your insurance policy. This property can be covered at either its replacement cost or its actual cash value, depending on the type of coverage you choose to purchase. 

Key differences between market value, replacement cost, and actual cash value

Shopping for and buying homeowners insurance can be a confusing process, especially if you aren’t well-versed in the insurance terms specific to the industry. To help, we’ve compiled some of the key differences between market value, replacement cost, and actual cash value in the quick reference charts below:

Market value vs replacement cost

	Market Value	Replacement Cost
What it is	The price you can realistically sell your property for in your local housing market	The cost to repair or rebuild your home today, using current building codes and at current market prices (labor, materials)
Factors influencing it	Age of the home, size of the home (square feet), architectural style of the home, local housing supply and demand, value of the land the house sits on	Age of the home, size of the home (square feet), architectural style of the home, local labor and construction costs, local supply and demand for labor and construction
What it’s used for	Typically used to calculate home equity, mortgage amounts, and list prices	Typically used to calculate the appropriate dwelling coverage for a property
How do they compare?	Usually higher than a home’s replacement value	Usually lower than a home’s market value

Replacement cost vs actual cash value

	Replacement Cost	Actual Cash Value
What it is	The cost to repair or rebuild your home today, using current building codes and at current market prices (labor, materials)	The cost to repair or replace property damaged or destroyed by a covered event, minus any depreciation
Factors influencing it	Age of the home, size of the home (square feet), architectural style of the home, local labor and construction costs, local supply and demand for labor and construction	Age and condition of personal property or roof, amount of depreciation
What it’s used for	Typically used to calculate the appropriate dwelling coverage for a property	Typically used to calculate personal property coverage; may be used to calculate coverage amounts for specific components of your dwelling, such as your roof
How do they compare?	Usually higher than a home’s actual cash value	Usually lower than the replacement cost for personal property or a roof

Choosing between coverage options

When it comes to insuring your dwelling, most insurers automatically default to replacement cost coverage, except for your roof, which may be insured at replacement cost or actual cash value. Some of the decisions to make as you consider what types of coverage you want to purchase include:

• Do you want to insure your roof at replacement cost or at its actual cash value? Although some carriers require actual cash value coverage for your roof (depending on your location and age of your roof), in many cases it’s up to you.
• Do you want to insure your personal property at replacement cost or its actual cash value?

At the end of the day, these are questions that only you can answer. What makes sense for someone else may not make sense for you. Before making any decision, it’s important to consider your monthly budget and whether or not it can absorb higher premiums associated with replacement cost coverage. It’s also important to think about your savings, and whether or not you can adequately fill the potential gap left by actual cash value coverage.

Not sure what’s right for you?

Matic can help evaluate your home’s unique features and find a policy with the right level of protection.

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