Skip to main content

Understanding Replacement Cost, Actual Cash Value, and Market Value 

Replacement Cost, Actual Cash Value, and Market Value

Let’s start with a real-life scenario. 

You just bought a house for $175,000. But the insurance company is telling you that the replacement cost for the house is only $250,000. How can this be?

According to your realtor, you bought the house at fair market value. 

Why then won’t the insurance company insure it for $175,000? Why are they going to cover $250,000?

That’s a great question! 

Clients get confused when they purchase a home for $175,000, but the insurance company calculates the homeowners’ insurance on a replacement cost of $250,000.

Why the discrepancy?

As a long-term insurance agent, I have gotten this question time and time again.

And the best way to answer is by explaining the difference between three important terms when it comes to the value of your home:

  1. Replacement Cost Value
  2. Actual Cash Value
  3. Market Value


In this article, I’ll lay out the difference between these three “values” so you can understand how the insurance company is pricing out your policy.

Let’s start with replacement cost value.

Replacement Cost Value

Replacement cost considers what it would cost to replace your home to it’s original qualitiy using the same materials.

Some insurance policies cover the replacement cost of your home. 

Replacement cost is what it will actually cost to replace your home or part of your home if it is destroyed or damaged. 

When the insurance company determines the replacement cost of your home, they evaluate what it would cost to replace your home to the same quality, with the same materials, at the same location.

Example of Replacement Cost Value

Let’s look at an example.

You own a log home just outside of Waynesburg, PA. It’s about ten years old and has a ton of custom features, including marble countertops, hardwood and tiled flooring, and custom-built cabinetry.

The insurance company will take all of those details into consideration when they write your policy. 

They will value your home based on what it would cost to replace your home with the same features of your current home – log construction, marble countertops, hardwood and tile flooring, and custom-built cabinetry.

Maybe you paid $400,000 to build your home, but now the cost of log construction is more expensive. The insurance company may value your house at a higher amount – like $450,000 or even $500,000 – if that is what it would cost to replace the house today.

Most homeowners’ policies are priced based on the replacement cost of your home.

Actual Cash Value

Some homeowner policies, however, provide coverage for the actual cash value of your home. 

What is actual cash value?

The actual cash value of your home is calculated by subtracting the depreciation from its original value. Typically, the actual cash value is 70% to 80% of a home’s original value.

To arrive at the actual cash value of your home, the insurance company determines the replacement cost of your home and subtracts the depreciation costs.

You could say that the actual cash value is what your home is worth at the time that is damaged or destroyed.

Often, mobile homes are insured for their actual cash value. Also, most auto insurance policies are based on the actual cash value of your vehicle.

Example of Actual Cash Value

Let’s look at a practical example of actual cash value.

Let’s go back to the log home that you built ten years ago for $400,000.

When you account for the depreciation of your home over the past ten years, your home would be valued at $280,000. The actual cash value is typically 70% or 80% of the original value of your home.

With an actual cash value policy, the insurance company would only pay you up to $280,000 if your home is destroyed.

Market Value

The market value of your home is determined by what houses similar to yours are being sold for in your area.

Now let’s touch on market value.

Market value is the amount your home can be sold for in a particular market. It’s what someone is willing to pay for your home.

Market value is significant in the real estate market. Your realtor can tell you what the market value is for your home in your particular location.

Example of Market Value

For instance, a three-bedroom home in Greene County, Pennsylvania, will have a much lower market value than that same three-bedroom home would have in New York City.

Now let’s revisit that $400,000 log home.

Let’s imagine you’re retiring and want to downsize and move into a smaller condo in town. You decide to put your home up for sale.

Fortunately for you, it’s a seller’s market. Houses are selling like crazy!

While you built your home for $400,000, your realtor tells you that the market value for your home right now is $495,000. Awesome, right?

What that means is that your home could expect to sell for around $495,000 right now.

Now, let’s say you hold off two years to move. And the housing market has slowed down quite a bit.

Your realtor tells you that the market value for your home is about $410,000. 

Because fewer people are looking to purchase houses like yours, its market value isn’t as high as it had been two years before.

The market value of a home is dependent on the supply and demand of the real estate market in your area. It’s based on the features of your home and how much houses like yours are selling for in your area.  

I just bought a home, and I need insurance. Who can help me?

If you just moved to a new area, finding an agent to take care of your insurance needs can be challenging. Most communities have lots of insurance agents and agencies. So how can you find the one that’s right for you?

As an independent insurance agent, let me confess that I am biased toward working with an independent agency. 

An independent agent has access to multiple companies to write your insurance policy. So, with one phone call, you can have your homeowners’ insurance policy quoted by several different companies.

But that’s not the only reason I would suggest working with an independent agent. When your insurance rates go up (and all companies raise their rates from time to time), your independent agent will have other options for your insurance policy.

But, as an independent insurance agent, I’m clearly biased toward this option.

Choosing Baily Insurance for Your Insurance

If you live in Pennsylvania, West Virginia, or Ohio, our team would be honored to help you get your homeowners policy in place. At the same time, we can quote your auto insurance as well to see if you qualify for extra discounts on your insurance.

The team at Baily Insurance is dedicated to helping our clients get the absolute best insurance coverage for our clients at the best price available. We work with dozens of top-rated companies and can help you find the one that will best meet your expectations.

Please give us a call or reach out to us by filling out the following form so we can get started on a quote for you right away!

We’re looking forward to serving you!