What Is Actual Cash Value? Understanding Your Home Insurance Policy

Actual cash value (ACV) is one way your homeowners insurance company can reimburse a property damage claim after a covered loss. Generally, policies with ACV pay you the value of the stolen or damaged item, minus depreciation.1

While this type of coverage can be inexpensive, any payouts you receive likely won’t be enough to replace your item with a new version. Understanding how ACV works can help when you’re choosing coverages for your homeowners insurance policy.

What is actual cash value for home insurance?

Actual cash value is a coverage option that determines how your insurance company reimburses you for an approved claim. When your insurance approves and processes your home insurance claim, your settlement is equal to the replacement value of your damaged or stolen item, minus the value of depreciation.

That means you might not get enough money to replace your item with a brand-new version. Instead, you’ll need to either buy an older version or cover the price difference out of pocket.

Here’s how home insurance companies usually calculate ACV:

• Calculate the cost of replacing an item with one that’s a similar kind and quality at today’s prices. This is known as the item’s replacement cost.

• Subtract depreciation from the replacement cost.

Companies calculate depreciation by assigning a lifespan to the item and determining the percentage of life left.2 The insurer then multiplies the percentage by the replacement cost to get the item’s ACV.

How actual cash value works

To figure an item’s ACV, an insurer determines the cost of replacing your damaged or stolen property. Then it decreases the value based on depreciation factors like age and condition.

Check your homeowners insurance policy to see if it contains ACV coverage. Here’s where you might find it:

Actual cash value vs. replacement cost coverage

ACV and replacement cost value (RCV) both refer to how you may receive reimbursement from your home insurer.

RCV coverage reimburses you the value of the stolen or damaged property regardless of depreciation. You can take the money and replace your property at today’s value, so it makes you whole after a covered loss. But insurance companies may issue your claim payout in two installments. You’ll get one check for the ACV of your property and another check for the recoverable depreciation portion of the claim.

ACV reimburses you for the amount your property is worth at the time of the damage or theft — not what it costs to replace it with something new. But you’ll typically get one check from the insurer, so the process is a bit more streamlined. ACV is also a more affordable option because your payout is typically less.

On the other hand, a replacement cost policy does the opposite. It doesn’t take depreciation into consideration, so your premiums increase but you also get a higher payout for a covered loss.

Actual cash value coverage pros and cons

Before updating your home insurance policy, consider the advantages and disadvantages of ACV.

Replacement cost coverage pros and cons

If you’re considering updating your policy to include RCV instead of ACV, consider these advantages and drawbacks.

How the actual cash value settlement process works

Most homeowners insurance policies default to ACV coverage for personal belongings. If you need to submit a homeowners insurance claim for stolen or damaged property, here’s how the process typically works:

1. Contact your homeowners insurance company. You’ll work with the insurer to file a claim, which may involve completing forms, submitting pictures of the damage, and submitting receipts for damaged or missing personal property.

2. Company calculates actual cash value. An adjuster from your insurance company will investigate your claim. They’ll calculate the replacement cost of your property and subtract the value of its depreciation to determine the ACV.

3. Receive payment. If your insurance company approves your claim, it provides a settlement and sends you a payment. The time it takes to receive the money depends on several factors, including your insurer and the nature of the claim.

4. Decide how to replace your property. ACV insurance payouts may not be enough to replace your property with a brand-new version. You can use the payment to buy an older version or pay the difference for a new model out of pocket.

Actual cash value FAQs