Actual cash value (ACV) is an insurance industry method of valuation that accounts for depreciation. ACV can be applied to any kind of insured property, such as a home or a vehicle. ACV payouts are based on the cost of the insured item, minus any depreciating factors like age or wear and tear.
Here you can learn how ACV affects the claims process, and how it compares to replacement cost.
What Is Actual Cash Value?
Actual cash value is what an insurance company determines property to currently be worth, after accounting for depreciation. The average person may encounter this term while making a car insurance claim or a claim on their homeowners insurance policy.
- Alternate name: Market value
- Acronym: ACV
Unless you have a replacement cost policy, the ACV is the amount of money that your insurance carrier will pay you if your property is totaled. If you total your motorcycle, for instance, the payout won't be the same amount as what you paid for it. You receive a payment for the actual cash value of your motorcycle—not its original price—because it is a depreciating asset, which means that it loses value over time.
Actual cash value is the estimated value of what your vehicle 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 property and subtracting depreciation—the wear and tear costs that accumulate after purchase.
If your car is damaged, for example, your insurance company 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 condition exceeds the value of the car, the insurance company deems it a total loss. In some states, the threshold for a total loss occurs at a certain percentage. For example, in Alabama, if the cost to repair the car is 75% of its value, then it's a loss.
In this scenario, the insurance company will pay you (or the lienholder if the car is financed) the vehicle's market value minus any applicable deductibles. Your insurance carrier will look at several different factors to calculate the amount of depreciation that has occurred. These factors include:
- Pre-loss condition
- Add-ons and modifications
- Recent sales prices of similar cars in your area
- "Salvage value" (the price its parts and metal could fetch on resale)
Insurance carriers don't use Kelley Blue Book to figure out these numbers. They may use some third-party help to calculate depreciation, but each carrier has its own system for calculating total loss payouts. However, you can still get a ballpark figure of what you might receive by using Kelley Blue Book to determine the value of your motorcycle, car, or another vehicle.
RV owners may want to opt for a replacement cost policy—RV awnings are especially susceptible to damage from weather, sun, and time.
ACV and Gap Insurance
Unfortunately, for those who financed the purchase of a car, the actual cash value payout may not cover what you still owe your lender. However, this is a fairly common occurrence, so insurance companies have created gap insurance to address this issue. In the event of a total loss, this type of policy helps you cover the "gap" between what you get and what you owe.
As a general rule of thumb, you may want to consider gap insurance if you're financing a new car for 60 months or longer, put less than 20% down, or are leasing your vehicle.
Alternatively, you can set up an emergency fund to cover the difference that you would have to pay in the event that your vehicle is totaled and you want to replace it with the same make and model. Regardless of which type of coverage you choose, it is always a good idea to look over your auto policy options to make sure you're covered in the way you expect.
Actual Cash Value vs. Replacement Cost
|Actual Cash Value vs. Replacement Cost|
|Actual Cash Value||Replacement Cost|
|Lower price for coverage||Higher price for coverage|
|Payouts take deflation into account||Payouts will cover replacement|
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 insured property. If you totaled your car, but you have replacement cost coverage, you will be able to buy a new car with the insurance payout.
For homeowner's insurance, the replacement cost will be set at a specific dollar value. If your home crumbles to the ground, and your replacement cost policy 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 policy 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 tragedy, a replacement cost policy could be worth it.
- Actual cash value is an insurance industry term for determining the value of an insured item after any depreciating factors.
- Insurance companies have their own methods for determining actual cash value—for car insurance, the factors include mileage, age, and add-ons.
- Actual cash value is different from replacement cost coverage, which covers the full cost of replacing the insured item in the case of tragedy.