What Is Actual Cash Value?

Definition and examples of actual cash value

Two damaged cars after a collision

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Actual cash value (ACV) is an insurance industry method of valuation that accounts for depreciation. ACV can apply to any kind of insured property, such as a home or a car. ACV payouts are based on the cost of the insured item, minus any factors that cause depreciation, such as age or wear and tear.

Here you can learn how ACV affects the claims process, and how it compares to other ways used to measure value, like the replacement cost method.

What Is Actual Cash Value?

Actual cash value (ACV) is what an insurance company measures property to be worth at a given moment in time, after they account for depreciation. You may come across this term if you need to make a car insurance claim, or a claim on your homeowner's policy.

  • Alternate name: Market value
  • Acronym: ACV

Some policies use replacement cost instead of ACV to figure out your payout. But unless you have this type of policy, the ACV is the amount of money that your insurer will pay you if your car or home is damaged beyond repair. And these two methods differ. If you total your car, for instance, the payout won't be the same amount as what you paid for it. When you receive a payment for the ACV of your car, it will be how much it is worth now, which is not its sticker price. This is because your car, like most assets, is a depreciating asset, which means that it loses value over time.

Actual cash value is the estimated value of what your car (or other asset) would be worth on the open market.

How Does Actual Cash Value Work?

The actual cash value is calculated by taking the replacement value of the insured item (or how much it would cost to replace the item in full, at market price) and subtracting depreciation, which is the cost due to wear and tear that builds up after purchase.

If your car is damaged, for example, your insurer will figure out whether it's a total loss by comparing its value to the estimated cost of repairs. If the cost to return it to its pre-loss state exceeds the value of the car, it will be deemed a total loss. In some states, the threshold for a total loss occurs at a certain percent of its fair market value. For example, in Kansas or New York, if the cost to repair the car is 75% of its value, then it's a total loss. In Iowa, the total loss threshold is only 50%. Then there are states like Texas, where the car must lose 100% of its fair market value to count as a total loss.

In this case, your insurer will pay you the car's fair market value minus any deductibles in your contract. (If you still owe money on the car, or if there is a lien, this amount will be paid to the lender or lienholder instead.)

How Much Value Is Lost Over Time?

There are a number of factors used to figure out how much depreciation has occurred. Some of the factors will differ, based on your carrier and contract, but in most cases these factors include:

  • Pre-loss condition (the state your car was in before the damage)
  • Mileage
  • Add-ons and upgrades
  • Recent sales prices of cars like yours in the same city
  • "Salvage value" (the price its parts and metal could fetch on resale)

Insurers don't use Kelley Blue Book to figure out these numbers. They may use a third-party tool or resource, but each uses its own system to measure total loss payouts. But you can still get a ballpark figure of what you might receive by using Kelley Blue Book to figure out the value of your car, or of any other car for that matter.

If you own an RV, you may want to opt for a replacement cost policy instead of one that uses ACV. This is because it is a common issue for RV awnings to suffer damage from weather, sun, and time.

ACV and Gap Insurance

So far ACV seems simple, but it can be a little more complex if you financed the purchase of a car. If so, the ACV payout may not cover what you still owe your lender. To address the issue, gap insurance helps you cover the "gap" between what you get as payout and what you owe.

As a rule of thumb, you may want to look into buying gap insurance if you plan to finance a new car for 60 months or longer, if you are putting less than 20% down, or if you are leasing your car. Gap insurance coverage, however, is not always a great deal and, at the very least, it's important to shop around for coverage.

Many people take their chances, to avoid the extra monthly bill. If you prefer to cover the gap on your own, it would be a smart move to set aside a "rainy day" cash or savings fund to cover the difference that you would have to pay in the event that your car is totaled and you want to replace it with the same make and model. Then if you pay the car off without needing it, you have paid yourself a small bonus.

Actual Cash Value vs. Replacement Cost

Actual Cash Value vs. Replacement Cost
Actual Cash Value Replacement Cost
Lower price each month Higher price each month
Payouts take deflation into account Payouts will cover cost to replace

If you're worried about losing out on insurance payouts, you may want to invest in replacement cost coverage. Unlike ACV, replacement cost payouts will give you the money you need to replace your car, home, or another insured item, to a degree.

  • Cars: If you totaled your car, but you have replacement cost coverage, you will be able to buy a new car with the payout.
  • Homes: For a home, the replacement cost will be set at a dollar value. If your home crumbles to the ground, and your contract is set at $250,000, you'll receive $250,000 that you can use to rebuild your home.

The tradeoff with replacement cost coverage is that it costs more in premiums. If you need to save money now, you might opt for an actual cash value plan. On the other hand, if you can afford higher costs now and want to ensure you won't need to dip into savings in case of a tragic event, a replacement cost policy could be worth it. No matter which type you choose, it is always wise to review your options and read the contract in full to make sure you're covered in the way you expect.

Key Takeaways

  • Actual cash value is an insurance industry term for determining the value of an insured item after any depreciating factors.
  • Insurers have their own methods to measure actual cash value; for cars, the factors include mileage, age, and add-ons.
  • Actual cash value is not the same as replacement cost, which covers the cost to replace the insured item if it is totaled.