Actual cash value

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Homeowners insurance is there for you to turn to when your home or property suffers damage or a loss. Homeowners are vulnerable to damage from severe weather, theft, fire or other disasters. But how much, exactly, does homeowners insurance pay to replace your property?

Well, that depends on if you’ve chosen a policy with replacement cost value or actual cash value. Luckily, if you have insurance then repairing your home or replacing your lost property shouldn’t cause detrimental damage to your wallet. But how much you get from the insurance company can vary. Read on to learn everything you need to know about actual cash value to help you decide what kind of homeowners insurance policy you want.

What is actual cash value?

Actual cash value is the price or value your item could be sold for today. It’s the cost that you paid for the item minus any depreciation. This means that you won’t be getting 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, if you have a TV that is 10 years old and it’s stolen during a break-in or damaged by a fallen roof then the actual cash value portion of your policy means you’ll receive a check for what the market price of the older TV is currently – as opposed to what it would actually cost to replace the TV. Oftentimes, what you originally paid will be less than the current market value.

ACV will save you money on your insurance premiums but you have to balance that with how much you’d have to pay out of pocket to replace your damaged items.

How is actual cash value determined by insurance companies?

When you file an insurance claim, an insurance adjuster will get involved to cost out your claim. They do this by determining how much it currently would cost to replace your lost or damaged item with a similar item and then subtracting 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

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. The check you receive if you have replacement cost as part of your policy will be higher than the check you would receive if you have ACV as part of your policy.

An actual cash value homeowners insurance policy is a great option if you’re on a budget since the premiums you have to pay will be lower than with a replacement cost homeowners insurance policy. Additionally, if you’re renting and don’t have many valuable items to insure then ACV may be all you need. Finally, if your home and its items are newer then it may be a good choice to go with an ACV policy for the moment while planning to switch to a replacement cost policy as your items and home age.

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

Things to consider when choosing between actual cash value and replacement cost:

  • Actual cash value premiums are lower than replacement cost coverage.
  • If you opted for replacement cost insurance, the insurance company will pay for new versions of your older gear in case of loss or damage.
  • Actual cash value insurance is a gamble — you’ll pay lower monthly premiums but may not be able to find a preowned version of the item you’re replacing to stay on budget.
  • You’ll need to have proof that your items were in good condition for an ACV policy, since the appraiser takes the condition of the item before it was lost or damaged into account.

Frequently asked questions

Does actual cash value cover everything?

Your homeowners or renters insurance doesn’t cover everything. If you have jewelry, collectibles, art or other high-value items, you may need to purchase an additional rider specifically designed for these harder-to-insure items. Speak with your insurance company about any items that would be difficult to replace. Items such as one-of-a-kind art or heirloom jewelry would need to be professionally appraised and listed on your policy so you receive a fair value for them if they’re lost or damaged.

How is depreciation determined?

The insurance company determines the depreciation of your item(s) or property by considering the condition it was in before it was stolen or damaged. For example, if you have a laptop that’s a few years old and you’re trying to sell it on eBay, you won’t be able to sell it for the same amount you paid for it. This is because the value of items decreases over time due to wear, tear and age. Additionally, if any damage has been done to the laptop that will further decrease the price you can sell it for. Insurance companies take all of these things into consideration when determining the depreciation of your property.

Is the actual cash value how much money I’ll receive from the insurance company?

Not necessarily. This depends entirely on whether or not you’ve met your deductible for the year. If you haven’t then the check you receive will be the ACV minus your deductible amount. But if you have met your deductible then the check you receive should be the ACV amount that was determined by your adjuster.