Actual cash value vs replacement cost

Imagine your home's roof is damaged during a Calgary hailstorm. Or your TV is stolen from your Toronto apartment. Your first question will likely be, "Will my insurance cover the full cost to replace my items, or what the item is worth used?" The answer to this question depends on whether your policy uses an actual cash value vs. replacement cost value method.

We get it, these two terms sound incredibly technical. But understanding them can make a huge difference when it comes to filing a claim with your insurance company. To ensure you know what to expect, we're going to break down these two terms, how they work in Canada, and which calculation method may be better for your situation.

Definition and basics: cost vs actual cash

First things first, we need to define what actual cash value vs replacement cost is:

Actual Cash Value (ACV) coverage

Actual Cash Value is the amount your insurance provider will pay to replace your insured items, while subtracting depreciation. That means they will consider how old your insured property is, what condition it was in at the time of the loss, and how much it's worth today, not what you originally paid.

For example, if you bought a couch for $2,000 five years ago, its actual cash value today may only be worth $700, given that it's experienced some wear and tear over the years. Therefore, under actual cash value coverage, your insurance company will pay you $700, not the $2,000.

Replacement cost coverage

Replacement Cost is what your personal belongings would be today's cost to buy a new item of a similar kind of item without deducting depreciation. So, if we're using the same example as above, if a similar new couch costs $2,200 today, then your insurance company will reimburse you $2,200.

As you can see, a replacement cost policy offers more financial protection against the loss of large ticket items compared to actual cash value coverage.

How depreciation works with actual cash value coverage

The main difference between actual cash value vs replacement cost policies is depreciation. Because depreciation is a main factor in actual cash value policies, it can substantially impact how much your insurance company pays you for a covered loss. Insurance companies calculate depreciation based on:

• Age of the item.

• Condition at the time of the loss.

• Expected useful life (how long it would have lasted).

Average depreciation rate

On average, household belongings depreciate at a rate between 10% to 20% per year. For example, upholstered furniture depreciates at about 10% per year over a typical 10-year lifespan. Electronics, on the other hand, like new laptops or TVs, often depreciate faster due to how quickly technology evolves.

The National Joint Council offers a detailed Depreciation Reference Table that can help you determine the depreciated value of your items following an insured loss. You can check out the depreciation table via the National Joint Council website here.

Benefits of replacement cost insurance policies

For many Canadians, replacement cost coverage offers more peace of mind when it comes to potential losses than actual cash value (ACV) coverage, given that you are more likely to recover enough money to replace your items after a covered loss of similar quality and of today's prices. The primary advantages of RCV coverage include:

Key advantages of replacement cost value

Why choose Replacement Cost Value? Key advantages:

• Full reimbursement for items without worrying about their depreciated value.

• Ideal for homeowners purchasing their first home insurance policy.

• Better for long-term savings as you won't have to dip into your personal finances to replace your items if they are lost or damaged.

This is especially true for provinces like British Columbia, where catastrophic floods have caused substantial damage in 2021, costing approximately $675 million in insurance payouts. Despite the severity of these events and events like this, the Insurance Bureau of Canada (IBC) reports that approximately 10% of Canadian families at high flood risk do not have flood insurance.

In Alberta, recent severe weather, including the Jasper wildfire in 2023, caused over $880 million in insured losses. The summer of 2024 alone saw total insured losses exceed $3.6 billion due to wildfires and hailstorms, making replacement cost coverage all the more valuable.

Which to choose: Actual cash value vs replacement cost

Choosing between replacement cost coverage and actual cash value coverage depends on your finances, budget, lifestyle, property type, and more:

• When actual cash value makes sense: For older vehicles, ACV policies are common, as these policies cost less than replacement cost value policies do.

• When replacement cost value is better: You own high-value items or a high-value property. With rising building material and labour costs, being able to replace your home relative to market value is essential.

How to know what you have

The Insurance Bureau of Canada (IBC) holds that more than half of Canadian policyholders are not entirely familiar with the terms of their insurance. To get a better understanding of what policy you have:

1. Review your policy documents under the “Coverage” or “Loss Settlement” sections.

2. Look for terms like “depreciated value” (ACV) or “replacement cost.”

3. Contact your broker or insurance agent for clarification.

What to ask your insurance provider

When speaking with your insurance provider, consider asking:

• Is my policy based on replacement cost vs actual cash value?

• What is the replacement value of my home or personal belongings?

• How is depreciation calculated for actual cash value claims?

• What documentation is needed to support a claim under my replacement cost coverage?

The bottom line

The difference between actual cash value and replacement cost coverage plan can make a difference of thousands of dollars in your pocket when you make a claim. If you have older belongings and are on a tighter budget, actual cash value may be enough. But for most homeowners and small business owners, replacement cost is the better option. If you're unsure which policy you have, contact BrokerLink to speak with a broker from our team today!

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