Actual Cash Value

Actual cash value (ACV) is a method of estimating the worth of an item of property for insurance purposes. Insurers calculate ACV by taking what it would cost to buy the item new today and subtracting depreciation costs based on its condition and age. The alternative valuation method to ACV is replacement cost (RC). Replacement cost does not take depreciation into account when computing an item's worth. With home insurance, ACV and RC coverage can apply to the actual structure of the home or the contents within it. For instance, homes are typically insured at replacement cost while the homeowner's possessions are insured at ACV. In this post, we'll explain ACV in further detail and provide an example of how it works.

Insuring Your Home's Structure

Insuring the structure of your home for actual cash value can result in massive losses if you ever have to file a claim. If your home is insured at actual cash value, you will only receive insurance benefits equivalent to what a buyer would pay for the house in the current market.

In other words, ACV coverage may not provide sufficient benefits for you to rebuild the house or even recover what you originally paid for it. Remember that the real estate value of a home and what it would cost to rebuild it from scratch are often drastically disparate figures; the cost of rebuilding is almost always larger. For this reason, insuring the structure of your home at ACV is very risky.

Insuring Your Possessions

Actual cash value coverage also applies to how your policy insures the possessions you keep in your home. Because ACV coverage reimburses policyholders for substantially less than replacement cost (RC) coverage, ACV coverage typically has much lower premiums. As a result, many homeowners choose to insure their belongings at ACV, not understanding that they would not be able to buy their belongings new with this coverage in the event of a loss. That is, the benefits you would receive from ACV coverage would only provide enough money to buy your lost possessions used and in the exact condition they were before the loss occurred.

Example Case: ACV vs. RC

To illustrate the difference between actual cash value and replacement cost coverage, consider the following example. A homeowner buys a TV for $2,000 in 2005. If the homeowner tried to sell the television today, he would probably receive about $100 for it. If the homeowner carried ACV coverage and the TV were stolen, the insurance company would only reimburse the insured for the TV's present-day value of $100. On the other hand, if the homeowner carried RC coverage and had his TV stolen, the insurer would reimburse him for what it would cost to buy the same TV brand new today. The price of the TV has likely gone down since 2005, so the insurer might reimburse the homeowner for $1,000. As you can see, this homeowner received an additional $900 in benefits in this case by carrying RC coverage instead of ACV.