What is Actual Cash Value?

Image of a home during repairs with a fireplace and a ladder

Actual cash value is the part of your home insurance policy that determines the value of your home’s structure and your personal property while accounting for depreciation. Understanding how much actual cash value coverage you have is important because this coverage will help you repair or replace your home in the event of damage or a natural disaster.

While there’s nothing like the feeling of purchasing a brand new car or home, did you know your brand new item starts losing value as soon as you buy it? For instance, when you drive a new car off the lot, its value drops by at least 10%.

As a homeowner, even though you can’t move your home off the lot, your brand new digs will still lose value every year. So when it comes to getting proper homeowners insurance coverage, it’s essential to know which policies take that deprecation into account. One of those policies is known as actual cash value (ACV).

Key takeaways:

  • For homes, you can expect an average depreciation rate of 3.6% per year.
  • The difference between actual cash value and replacement cash value has to do with depreciation.
  • If you have actual cash value coverage and the damage you want to file for is less than your deductible amount, you may want to hold off filing a claim and just pay for the damage yourself.

How does actual cash value work?

Most items lose value over time. Whether or not the item itself gets damaged, used items are inherently less valuable than brand new items. Given that even the most cared-for items still experience some amount of wear and tear, depreciation will always be considered when determining their value. 

To understand how ACV works, you’ll first have to understand the following terms: depreciation and replacement cost.

  • Depreciation is how much an item has decreased in value over time. When determining how much to reimburse for home or personal property loss, home insurance companies consider depreciation. 
  • Replacement cost is the value of an item at today’s price. For example, if the going rate for a new TV is $3,000, then $3,000 would be the “replacement cost.”

Actual cash value formula

Actual cash value can be determined by calculating the replacement cost of an item while accounting for any depreciation the item has undergone. The actual cash value formula looks something like this:

Replacement cost of an item - depreciation of an item = the item's ACV

Actual cash value vs. replacement cash value

The difference between actual cash value and replacement cash value (also known as replacement cost coverage) has to do with depreciation. Replacement cash value pays you to repair or rebuild your home to its previous condition without deprecation taken into account. It also pays to replace your damaged, destroyed or stolen personal belongings with new items of similar kind and quality.

Another option to secure more coverage for your belongings is known as extended replacement cost. Extended replacement cost is an expansion of your current dwelling or property coverage limit to cover extra rebuilding costs that aren’t within your control. Though it’s worth noting with both extended and traditional replacement cost policies, you’ll likely be paying more upfront to insure your property.

Replacement cash value pays you to repair or rebuild your home to its previous condition without deprecation taken into account.

How is actual cash value determined by insurance companies?

As mentioned above, ACV helps determine how much your home’s structure and your belongings are worth, including any depreciation. But there isn’t a one-size-fits-all depreciation rate for all the items that you own. 
 
For homes, you can expect an average depreciation rate of 3.6% per year. So if you buy a new build at $350,000 and need to completely rebuild 10 years later, it will have depreciated to a value of $224,000.

But to determine how much you’ll get from your insurance company, you’ll need to find the replacement cost of a similar home in your area. Say that a new build in your neighborhood (that’s similar to your home) sold for $400,000 in recent years — that’s the amount your insurance will deduct depreciation from to pay you for your rebuild. When calculating a 36% depreciation (3.6% annual depreciation rate multiplied by 10 years) of $400,000, you can expect to get $256,000 to complete your rebuild.

Some items have a higher rate of depreciation than others. According to Claims Pages’ depreciation calculator, TVs have a depreciation rate of 8% per year while less expensive items like bookcases have a depreciation rate of 5% per year. 

Here’s another example: If you bought a TV for $3,000 two years ago, and it was stolen. Newer TVs cost around $3,500 today, but insurance companies have to consider depreciation when determining how much to reimburse you to buy a new one. So by calculating 16% of $3,500 and subtracting, your insurance company would pay you $2,940 for your stolen item.

For items outside of your home itself, the depreciation rate will vary widely. To help determine how much your item will be worth in a few years time, check out the depreciation calculator by Claims Pages.

Suppose your home becomes so damaged that it’s deemed a total loss, meaning the cost to replace the home is higher than its current value. In that case, you can expect to be reimbursed for the market value of your home minus depreciation (of what your home was worth before the total loss) and your deductibles.

Filing a claim with actual cash value coverage

If your belongings or property are damaged or stolen, and you’ve decided to file an insurance claim with your insurance company, take a look at your declaration page to determine the type of coverage you have. If you have ACV, you’ll need to pay close attention to your deductible limit. If the damage incurred is less than your deductible amount, you may want to hold off filing a claim and just pay for the damage yourself. This way, you don’t run the risk of your home insurance premium rising. However, if the cost of damages is more than your deductible, file immediately. Your insurance policy can help cover the cost of needed repairs and protect your home - that’s what it is there for.

Just because the idea of depreciation looms in the background, that doesn’t mean you shouldn’t splurge on something new from time to time (you deserve it). As long as you take the time to get more coverage — like a scheduled personal property rider — for your newer purchases, you can enjoy your shiny new items guilt-free. Or just look for a full-coverage homeowners insurance policy with a company that has your back. That works too.