Actual cash value

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Actual cash value (ACV) is the amount your stolen or damaged property is worth after a covered loss, minus depreciation. Understanding actual cash value is important because home insurance companies often use it as a metric to decide how much a policyholder should be paid after a covered loss for belongings covered under their policy.

While the structure of your actual home will always be covered at replacement cost under your dwelling coverage (up to certain limits), actual cash value home insurance isn’t the only option for your other belongings. Some policyholders opt for a replacement cost feature instead. In this article, Bankrate outlines actual cash value, how it’s calculated, and how it differs from replacement cost.

What is actual cash value?

Actual cash value is the price or value an item could be sold for today. Basically, ACV means that you won’t get a check from the insurance company for enough money to replace your damaged, lost or stolen item with a brand new version. Instead, you’d either have to pay out of pocket to cover the difference – or purchase an older or used version.

For example, suppose you have a TV that is 10 years old, and it’s stolen during a break-in or damaged during another covered loss. In that case, the actual cash value portion of your policy means you’ll receive a check for the current market price of the older TV – as opposed to what it would cost to replace the TV with a brand new version.

ACV will typically save you money on your home insurance premium. Still, before you decide what type of coverage you want, you should consider how much you’d have to pay out of pocket to replace your damaged items after a covered loss.

How is actual cash value determined by insurance companies?

Actual cash value is calculated by determining how much it would cost to replace a certain object and subtracting depreciation. Insurance companies assign a lifetime to an object and determine the percentage of its lifetime left to calculate depreciation. When this percentage is multiplied by the replacement cost, the result is an item’s actual cash value.

When you file an insurance claim, an insurance adjuster will get involved to determine the cost of your claim. If you have agreed to value your covered items at actual cash value, they will determine how much it currently would cost to replace your lost or damaged item with a similar item and then subtract the loss in value due to depreciation from that amount.

With our flat-screen TV example mentioned above, the check received from the insurance company will be less than the price of a brand new TV. The adjuster would calculate the depreciation value based on the TV’s age, condition before the loss, brand, etc. To replace the TV with no cash out of pocket, you may need to look for an older or used model – or even downsize to a different model or type of TV.

Actual cash value vs replacement cost

The difference between actual cash value and replacement cost is simple. While ACV depends on the depreciated value of your lost, stolen or damaged goods, replacement cost refers to how much it would cost to replace your damaged item with a brand new model. If you have replacement cost as part of your policy, the check you receive will be higher than the check you would receive if you have ACV as part of your policy, but you will pay more for your premium.

How do I choose between ACV and replacement cost?

An actual cash value homeowners insurance policy is a great option if you’re on a budget since your premium will be lower than with a replacement cost homeowners insurance policy. If you don’t have many valuable items to insure, then ACV may be all you need. Again, you won’t have a choice for your dwelling coverage, which will always include replacement cost coverage up to your policy limits.

Replacement cost policies can be a good idea if you have a lot of older items, live in a high-risk area or have a lot of belongings you need to insure. Replacement cost coverage will have a higher premium – but it means that you’ll be paying less out of pocket when it comes time to replace anything that is damaged or stolen after a covered loss.

Actual cash value pros and cons
Pros Cons
Premiums for actual cash value home policies are typically lower than replacement cost coverage. Actual cash value insurance is a gamble — you’ll pay lower premiums but will probably have to come out of pocket to get a decent replacement version of your lost or damaged items.
You’ll need proof that your items were in good condition for an actual cash value home policy since the appraiser takes the item’s condition before it was lost or damaged into account.

Replacement cost value pros and cons
Pros Cons
You’ll pay less out of pocket if you need to replace anything damaged or stolen in the future.
If you have older items, they’ll be paid out in a higher amount than if you have actual cash value home insurance.
Replacement cost coverage will have higher premiums than actual cash value insurance.

Frequently asked questions

What is the difference between actual cash value and replacement value in claim settlements?

In claim settlements, actual cash value payouts will be lower than replacement value payouts. Actual cash value payouts factor in depreciation, whereas replacement value payments will provide enough money to replace your item with a new version.

Which is better: replacement cost or actual cash value?

It depends. Replacement cost premiums are higher but will provide a higher payout when it comes time to replace a lost or damaged item. Actual cash value payouts will be lower, but you’ll also pay a lower premium for this feature. You might want to speak with your insurance agent to see which is right for you.

Does my home insurance policy use replacement value or actual cash value?

The easiest way to determine whether your policy has replacement value or ACV is to consult your home insurance policy documents. If you can’t find this information, you may want to call your insurance agent, who can speak to the specifics of your policy. Your dwelling coverage will always include replacement cost coverage up to certain limits.

Does actual cash value only apply to homeowners insurance?

No, actual cash value can apply to auto insurance. ACV auto insurance would pay the current market price for your totaled or stolen vehicle rather than paying out the cost of a new car.

Written by
Lizzie Nealon
Insurance Writer
Lizzie Nealon is an insurance writer for Bankrate. Her favorite part of the job is making home, auto and life insurance digestible for readers so they can prepare for the future.
Edited by
Insurance Editor