Definition and Example of Actual Cash Value
Actual cash value (ACV) is how an insurance company measures a property's worth at a given moment in time. It accounts for depreciation. You may come across the term if you make a car insurance claim, or a claim on your homeowner's policy.
Some policies use replacement cost instead of ACV to calculate your payout, but you must elect this provision on your policy. Otherwise, ACV is the amount of money your insurer will pay if your car or home is damaged beyond repair.
If you total your car, the payout won't be the same amount as what you paid for it. It will be for how much the vehicle was worth at the time of the accident. Your car is a depreciating asset. It loses value over time.
- Alternate name: Market value
- Acronym: ACV
Actual cash value is the estimated value of what your car (or other asset) would be worth on the open market at a particular point in time.
How Does Actual Cash Value Work?
Actual cash value is calculated by taking the replacement cost of the insured item (how much it would cost to replace it in full at market price) and subtracting depreciation due to age and the wear and tear that builds up after purchase.
Your insurer will figure out whether your car is a total loss by comparing its value to the estimated cost of repairs. It will be a total loss if the cost to return it to its pre-damage condition exceeds the value of the car.
The threshold for a total loss occurs at a certain percentage of its fair market value, and that can vary by state. For example, your car would be a total loss in Kansas or New York if the cost to repair it were 75% of its value, but the threshold is only 50% in Iowa. Then there are states like Texas where a car must lose 100% of its fair market value to count as a total loss. Your insurer will pay you the car's fair market value minus any deductible in your contract in that case.
The claim will be paid to the lender or lienholder if you still owe money on the car and it's a total loss.
How Much Value Is Lost Over Time?
A number of factors are used to figure out how much depreciation has occurred. They will vary, based on your carrier and your contract, but they often include:
- Pre-loss condition (the state your car was in before the damage)
- Add-ons and upgrades
- Recent sale prices of cars like yours in the same city
- "Salvage value" (the price that its parts and metal could fetch on resale)
Each insurer uses its own system to measure total loss payouts. They don't use Kelley Blue Book to figure out these numbers, but they may use a third-party tool or resource. You can still get a ballpark figure of what you might receive by using Kelley Blue Book to help you estimate the value of your car.
You may want to opt for a replacement cost policy instead of one that uses ACV if you own an RV. It's common for RV awnings to suffer damage from weather, sun, and wear through time.
ACV and Gap Insurance
ACV can become more complex if you financed the purchase of your car and haven't paid it off yet. The ACV payout might not cover what you still owe your lender. Gap insurance addresses this issue. It helps you cover the "gap" between what you get as payout and what you owe.
You may want to look into buying gap insurance if you plan to finance a new car for 60 months or longer, if you're putting less than 20% down, or if you're leasing your car. Many people take their chances to avoid the extra monthly bill for this type of insurance. You might want to set aside the money in an emergency fund to cover the difference between the car's value and your loan balance instead.
Actual Cash Value vs. Replacement Cost
|Actual Cash Value vs. Replacement Cost|
|Actual Cash Value||Replacement Cost|
|Lower premium each month.||Higher premium each month.|
|Payouts take deflation into account.||Payouts will cover cost to replace.|
Unlike ACV, replacement-cost payouts give you the money necessary to replace your car or home or another insured item, at least to a degree.
- Cars: You'll be able to buy a new car with the payout if your car is totaled but you have replacement cost coverage.
- Homes: The replacement cost will be set at a dollar value. You'll receive $250,000 that you can use to rebuild your home if it crumbles to the ground, and your contract is set at $250,000.
The tradeoff with replacement cost coverage is that it costs more in premiums. You might opt for an actual cash value plan if you want to save money now. However, a replacement cost policy could be wise if you can afford higher costs now and want to ensure that you won't need to dip into savings in case of a tragic event later.
It's always wise to review your options, no matter which type of insurance you choose. Read the contract in full to make sure you're covered in the way you expect.
- "Actual cash value" is an insurance industry term for determining the value of an insured item after taking any depreciating factors into account.
- Insurers have their own methods to measure actual cash value. Factors include mileage, age, and add-ons for cars.
- Actual cash value is not the same as replacement cost, which covers the cost to replace the insured item if it's totaled.
Progressive. "Replacement Cost vs. Actual Cash Value."
Kelley Blue Book. "What Is Depreciation?"
Carinsurance.com. "Total Loss Thresholds by State."
Erie Insurance. "When Is a Car Considered Totaled – and What Happens When It Is?"
GEICO. "GEICO's Total Loss Process."
Insurance Information Institute. "What Is Gap Insurance?"
United Policyholders. "What’s UP with Gap Insurance?"