What Is Actual Cash Value?

Actual cash value (ACV) in insurance refers to the value assigned to an insured item when lost, damaged, or stolen. It’s essentially the cost to replace or repair the item, considering its depreciation or reduction in value due to factors like age, wear and tear, or obsolescence.

Actual cash value is something that you should understand as a policyholder so you can be prepared if something happens to your personal property. It can apply to homeowner’s insurance, car insurance, and some business policies.

How Does Actual Cash Value Work?

Actual cash value provides coverage for the market value of an item as of today. For example, say you have a 10-year-old television stolen or damaged by a covered incident. ACV coverage would provide reimbursement for the current value of that specific TV rather than what it would cost to replace it with the newest model. So if you bought the TV for $300, but it’s only worth $75 today, your ACV policy would pay $75.

How Is Actual Cash Value Calculated?

While you may have an idea of the value of your items, insurance companies will not simply accept your estimates. Instead, the actual cash value in insurance is calculated with a specific formula.

The process begins with determining the item’s replacement cost. This equals the amount it would cost to buy a new item of the same kind and quality or repair it, whichever costs less. Next, the insurer calculates depreciation by determining the time left in the item’s useful life. Finally, they multiply this percentage by the replacement cost to calculate the ACV.

See It In Action

For example, assume your couch was destroyed in a fire, and that the following details apply:

Your couch was 6 years old
A new couch of the same kind and quality is $3,200
The life expectancy of a couch is 10 years, so your couch had 40% of its useful life remaining

When calculating actual cash value, the insurance company multiplies the replacement cost by the percentage of expected life remaining. In this case, $3,200 x 40% = $1,280. With an actual cash value policy, you would receive a check for $1,280. On the other hand, if you had replacement cost coverage, the carrier may send you an initial check for $1,280 and then send a second check for $1,920 — the recoverable depreciation — after you replace the couch, ultimately providing you with the full replacement cost.

Types of Insurance That Use the Actual Cash Value Method

Auto and home insurance are the two most common types of policies that use ACV as a coverage option. It is crucial that you understand how this method works.

Actual Cash Value in Auto Insurance

When an accident or a covered incident damages your vehicle, the insurance company determines the cost to fix it. If this cost exceeds a certain percentage of the vehicle’s value, the insurer deems the car a total loss, or “totals” it.

In this case, the insurer determines your payment amount by estimating the current replacement value of the vehicle and making depreciation deductions based on the vehicle’s make, model, year, accident history, wear and tear, mileage, and other factors.

Actual Cash Value in Home Insurance

A homeowner’s insurance claim on a policy with actual cash value coverage works in much the same way as with auto insurance.

For example, assume your 8-year-old refrigerator was destroyed during a kitchen fire, and you file a claim with your insurance company. Even if a new replacement refrigerator costs $2,000, if your exact 8-year-old refrigerator is only worth $500 today because it is a now outdated model, your insurer would send you a check for $500 (minus your deductible).

The same concept applies to larger-scale claims. For example, if a windstorm destroys your 10-year-old roof, the insurance company pays a reduced amount for the roof’s age and condition prior to the damage rather than the full amount it costs to put on a new roof. If you still need to meet your deductible, this is also subtracted from your payment amount.

Should You Choose Actual Cash Value?

Actual cash value will not be the right coverage method for everyone, and it has pros and cons. Consider choosing ACV if the following apply to you:

Affordability matters to you: If you want to pay lower premiums, ACV may be an option. Remember that while it may cost less, your items may not be replaced in the way you would like.
You have older items: If much of your personal property is older, it is worth less, so ACV could be a good option.
You are financially stable: It may make sense to insure your items with ACV if you are financially sound and can afford to upgrade old items without insurance during a claim.

Advantages

There are some definite advantages to your home and personal property coverage using actual cash value instead of replacement cost.

Savings: Actual cash value is usually cheaper than replacement cost, saving you money on your overall insurance premiums.
Suitable for old property: If your personal property is older, it can be more financially savvy to insure at ACV.
Fair: Since the market value is used to help determine ACV, it can be considered fairer.
Cost-effective: ACV can tend to be the most affordable option for those looking to have a nice balance between coverage and out-of-pocket expenses.

Drawbacks

As with anything that has advantages, there will also be disadvantages that you should be aware of to be able to make an informed decision.

Depreciation: Since the calculation of actual cash value includes depreciation, some older items may need a higher payout for you to be able to replace them.
Out-of-pocket expenses: Because of the depreciation aspect, you could experience more out-of-pocket costs than you plan for.
Undervalues new items: ACV may cause newer items you have purchased to be undervalued depending on market value and the economy.
Subjective calculations: The calculation to determine ACV (replacement cost minus depreciation) can be quite complicated and subjective.
Age: The age of items is heavily considered rather than the value, so if you have many antique items, you may end up with a coverage gap.

Alternatives to Actual Cash Value

After reviewing the advantages and drawbacks of ACV, you may want to consider some alternatives such as replacement cost or recoverable depreciation.

Actual Cash Value vs. Replacement Cost

Replacement cost coverage will replace your damaged, stolen, or destroyed item with a brand-new item of the same kind and quality, even if that new item is a newer model. On the other hand, actual cash value provides you with an amount equal to the item’s depreciated value.

When comparing the two options, remember that while replacement value provides a higher coverage amount, it also comes with a higher insurance premium. On the other hand, ACV may save you money on your premiums, but if your property is stolen, damaged, or destroyed, you will receive a lower benefit amount.

Actual Cash Value vs. Recoverable Depreciation

Recoverable depreciation is the difference between replacement costs and actual cash value. When you choose a policy with ACV coverage, the depreciation is not recoverable, and the insurance carrier pays the reduced amount. However, if you have replacement cost coverage, the depreciation is recoverable.

Insurance carriers typically pay replacement cost reimbursements in two phases. The first check covers the depreciated value, or actual cash value, of the items. Then, once you have replaced or repaired the items, the carrier sends a second check for the recoverable depreciation. Insurers split payments in this way to prevent fraud and incentivize policy owners to spend the money on making repairs or replacements as intended.

How to Negotiate Actual Cash Value

During claim time, you may experience the need to negotiate actual cash value for your home or personal items. Knowing how to do so effectively can help you navigate what could be a complicated process.

Get your items appraised. For items that you believe are worth more than what insurance is offering you, obtain an independent appraisal since it will be unbiased.
Keep all of your documentation. Try to keep any and all documentation for things you buy, like receipts or certificates of authenticity. Photographs are also a great thing to have for proof.
Understand depreciation. Understand how depreciation works and expect this when you have ACV as the coverage method on your policy.
Calculate the ACV. Use depreciation calculators or formulas (considering the item’s age, condition, and market value) to estimate the ACV of each item. Document the rationale behind your calculations.
Begin the negotiation process. Present your evidence. Explain why you believe their initial valuation is inaccurate and provide your evidence to support your valuation.
Consider professional help. If negotiations stall or become complex, consider seeking assistance from a public adjuster or an attorney experienced in insurance claims.
Review settlement offers. Carefully review any settlement offers provided by the insurance company. If you’re unhappy with the offer, you may be able to escalate the matter.

Putting It All Together

Homeowner’s and auto insurance are two common policies that you should continuously review and understand regarding actual cash value coverage. When stacked up against replacement cost, you may see that you will receive less payout.

Depending on your home and personal belongings, you may want to compare ACV and RC to see which will be most beneficial for your situation. Always make sure you know which valuation will be used at claim time, and if you need help understanding, contact an insurance professional to help you.

Frequently Asked Questions

Yes, you can negotiate actual cash value after a loss as long as you have something to back up your value, like a receipt, appraisal, or other documentation. You cannot just disagree; you have to have supporting documentation.

The actual cash value of any item can change quite frequently. It will depend on the age, market conditions, and any upgrades you may have done. Each year an item gets older, it will depreciate more. However, if you made upgrades, that could also change the value.

If you disagree with the insurer’s valuation at claim time, you can communicate with them about it. You can negotiate as long as you have some supporting documentation to support your opinion on the valuation. The only time this can usually be an issue is with antiques, so it is recommended that you insure them separately.

Inflation can increase the cost of replacing items since the cost of goods is higher. However, this can increase the chance that your items insured for actual cash value will be undervalued since depreciation is still occurring at the same pace, but things are more expensive to replace.

If you improve or upgrade something insured for ACV, let the insurer know and keep all documentation supporting it. You will get more of a payout if something is upgraded than the ACV of it as-is.

What Is Actual Cash Value (ACV)?