Actual cash value (ACV)
What is actual cash value?
Actual Cash Value (ACV) is the amount an insurance provider will pay for a damaged, lost or stolen item at the time of a claim, factoring in depreciation. Unlike Replacement Cost Value (RCV), which reimburses the full cost to replace an item with a new equivalent, ACV reflects the item’s current market value based on its age and condition rather than what was originally paid for it.
For example, if a homeowner’s 10-year-old roof is damaged in a storm, an ACV-based policy will subtract depreciation from the total replacement cost. The payout would reflect the roof’s current worth, not the cost of installing a brand-new one.
How does actual cash value work?
The basic idea behind ACV is depreciation. Over time, most assets lose value due to age, usage, and market trends. When a policyholder files a claim, the insurance company determines how much the asset is worth at the time of loss rather than reimbursing the full cost to replace it.
Here’s a step-by-step look at how ACV is determined in an insurance claim:
- Loss occurs – A covered item (e.g., a laptop, vehicle or furniture) is damaged, stolen, or destroyed.
- Insurer assesses original value – The company reviews receipts, appraisals, or past valuations.
- Depreciation is applied – The insurer calculates the item’s reduced value based on age, wear and tear and market trends.
- Payout is determined – The insurer subtracts depreciation from the item’s replacement cost to calculate the ACV payout.
This approach helps insurance companies balance payouts with risk exposure. It also means policyholders may receive less than the full replacement cost from their insurance company unless they have additional coverage.
How is actual cash value calculated?
Most insurance companies calculate ACV using the following formula:
ACV = Replacement Cost – Depreciation
Key factors affecting depreciation:
- Age of the item – The older the asset, the greater the depreciation.
- Condition and wear and tear – Items in poor condition have lower ACV.
- Market value trends – If an asset has declined in demand or technology has advanced, its value decreases.
Example calculation
Let’s say you have a five-year-old television that originally cost $1,000 and has an expected lifespan of 10 years. Depreciation is applied at 10% per year:
- Depreciation over five years – 10% × 5 = 50%
- Depreciation amount – 50% of $1,000 = $500
- ACV payout – $1,000 – $500 = $500
If you were to file a claim for a stolen TV under an ACV-based policy, the insurance company would pay $500, not the $1,000 needed to purchase a new one.
Example of actual cash value in action
To better illustrate how ACV works, consider this real-world scenario:
Scenario: a homeowner’s roof damage
A homeowner’s 15-year-old roof is severely damaged by hail. The cost to replace the roof with a brand-new one is $15,000.
The insurance company determines that the roof has a 20-year lifespan, meaning it depreciates by 5% per year.
- Depreciation amount – 5% × 15 years = 75% depreciation
- Depreciation cost – 75% of $15,000 = $11,250
- ACV payout – $15,000 – $11,250 = $3,750
Since the ACV payout is only $3,750, the homeowner would have to cover the remaining cost out of pocket.
ACV vs. Replacement Cost Value (RCV)
A key distinction in insurance is the difference between Actual Cash Value (ACV) and Replacement Cost Value (RCV). While ACV accounts for depreciation and pays only the item’s current value, RCV provides enough reimbursement to replace the lost or damaged item with a new one of similar quality.
Because ACV policies deduct depreciation, the payout is usually lower and the premiums more affordable. However, if replacing an item out of pocket isn’t ideal, an RCV policy may be the better option. With RCV coverage, depreciation is not deducted, meaning you receive enough to fully replace the item without additional expenses beyond your deductible.
For policyholders, the choice between ACV and RCV depends on their budget, risk tolerance, and the value of their insured property. If you want to keep your insurance premiums lower, ACV might be a good fit. If you prefer full coverage with minimal out-of-pocket replacement costs, RCV is worth considering.
Recoverable depreciation: Can you get a higher payout?
Some policies include recoverable depreciation, allowing policyholders to claim back the deducted depreciation amount once they provide proof of repair or replacement.
Example of recoverable depreciation:
A $10,000 roof has 50% depreciation, leading to an initial ACV payout of $5,000. However, if the policy includes recoverable depreciation, the homeowner may receive the remaining $5,000 after installing the new roof and submitting invoices.
If depreciation is non-recoverable, the homeowner must pay the difference out of pocket.
Common uses of ACV in insurance
ACV is widely used in various types of insurance:
- Homeowners & renters insurance – Covers roofing, furniture, appliances and personal property at a depreciated value.
- Auto insurance – Determines the payout for total vehicles based on their current market value.
- Commercial insurance – Applies to business assets, inventory and equipment.
Considerations for policyholders
If your policy is ACV-based, keep these tips in mind:
- Understand depreciation rates – Ask your insurance carrier how they calculate depreciation for common assets.
- Keep receipts and appraisals – Documentation can help support a higher valuation during a claim.
- Consider add-ons – Some policies offer endorsements to bridge the ACV gap with additional coverage.
- Evaluate financial impact – If replacing valuable items out-of-pocket isn't ideal, an RCV policy may be a better option.
FAQs
Which is better, ACV or RCV?
It depends on your needs. ACV policies offer lower premiums, but payouts are lower due to depreciation. RCV policies provide full replacement coverage but come with higher premiums.
Does ACV cover full replacement costs?
No. ACV deducts depreciation, meaning policyholders must pay the difference to fully replace an item.
Can I upgrade from ACV to RCV?
Yes, many insurance companies offer RCV upgrades or policy riders for an additional cost.