Written by Stephen Dyck
Say your basement floods, rendering your downstairs television and sound system inoperable. Should the insurance company pay you out for the resale cost of the actual items you lost? Or, for the cost to replace that technology with a new, similar product?
The above are the two main ways to calculate your payout. They are known as replacement cost and actual cost value, and they can result in not only very different payouts, but varying premium costs as well. Obviously there’s quite a difference between these two price tags, so it’s something that you should consider before you sign up for your homeowner’s or tenant’s insurance policy. Read on to learn more about these two calculations.
To help simplify these tenant insurance terms, we’ll be going over their definitions, what the pros and cons are between them, and then concluding with some important differences.
Actual Cash Value coverage reimburses you for the value of your items at the time they were damaged or lost — not what you originally paid for them. This amount takes depreciation into account, meaning your payout reflects wear and tear, age, and market value.
Let’s say your five-year-old TV is destroyed in a flood. It originally cost $1,200, but with depreciation, its current market value might only be $300. If your policy uses ACV, your insurer will likely give you $300 — enough to buy a similar five-year-old TV on the resale market, not a new one.
Lower monthly premiums
Ideal for people who want basic, affordable coverage
Payouts may not be enough to replace your items with new ones
You might need to cover the difference out of pocket
Replacement Cost coverage pays you the amount it would take to buy a new version of the item you lost — of similar type and quality — without deducting for depreciation.
If that same five-year-old TV is destroyed and your policy covers Replacement Cost, your insurer might pay out $1,200 (or whatever it costs today to buy a new version with similar specs), regardless of how old the original was.
Higher payouts that let you replace items with new ones
Helps you recover faster and return to normal after a loss
Monthly premiums are typically higher
May require more detailed documentation during the claims process
Both calculation methods of replacement cost and actual cash value have their own pros and cons, so there’s not one that’s better than the other. This means it’s really up to the policyholder to decide which calculation method is right for them.
Generally, getting a policy that will cover the actual cash value of items that are lost or damaged is great if you are looking for a policy that will offer you some protection while only charging you low premiums.
However, if you’re looking to get plenty of protection for lost or damaged items and aren’t worried about paying higher premiums, getting a policy that covers the replacement cost of your items is the way to go.
APOLLO offers effortless tenant insurance designed to protect renters across Canada. Get your free quote in less than a minute and we’ll send your policy documents right to your inbox.
Originally published November 9, 2022, updated April 2, 2025
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