Actual cash value (ACV) in homeowners insurance is one way to determine how much your property is worth. The actual cash value of your home or personal property is calculated by subtracting an amount for depreciation, deterioration, or obsolescence from the replacement cost.
Depending on the state, the replacement cost may include labor, taxes, fees, installation costs, and materials. But when you insure the property for its actual cash value, you're only covering the replacement cost minus the amount the property has depreciated. You receive what the item is worth at the moment of the loss, not what it costs to replace it with something brand new.
Actual cash value is not the same as market value. Often, your home's market value is much higher than the home's actual cash value because it doesn't take depreciation into account.
How is actual cash value calculated?
ACV coverage can be an attractive option for homeowners in some cases. The premiums are usually lower than those for replacement costs coverage. But it's important to understand how this coverage works so you aren't surprised when it's time to file a claim.
Let’s say you insure your home for its actual cash value. Years later, wind damages your roof, which is 12 years old, and the repairs cost $15,000.
Your insurance provider is not going to pay the full amount to repair the damage. Instead, it will pay out what your roof is worth at the time of the loss. Your provider will likely use this calculation to figure out the years of use left in your roof and its depreciated worth:
R × (E - C) / E = ACV
R = replacement cost of the item
E = expected lifespan of the item
C = current life of the item
ACV = actual cash value
So if your roof has an expected life of 15 years, the actual cash value comes to:
$15,000 x (15-12) / 15 = $3,000
It would be your responsibility to come up with the rest of the funds to handle the repair.
By contrast, if you have replacement cost coverage, only your deductible would be subtracted from your payout.
When does actual cash value coverage apply?
Most home insurers use replacement cost coverage for the physical structure of your home, but that’s not true for personal property. Providers typically default to actual cash value coverage for the belongings inside your home, such as:
- Furniture
- Appliances
- Clothing
- Dishes
- Electronics
You can see how insuring for the actual cash value of some items may end up being expensive. Electronics, for instance, depreciate quickly, so your ACV payout from a stolen laptop may not come close to what it costs to replace it.
When do you need actual cash value coverage?
For some people, insuring property for its actual cash value may make sense. For example, you might go this route if:
- You’re confident you can make repairs. DIYers may decide an actual cash value policy is the more affordable option.
- You are comfortable replacing your property with older or used items. ACV coverage might make sense if you have access to older, affordable replacements.
- Your budget can’t handle higher premiums. Actual cash value coverage is usually less expensive, so this option may help you save money now at a potential cost to you later.
When in doubt, ask us for guidance.
How do I know if I have actual cash value coverage?
Read your policy closely or review it with your agent to make sure you understand what to expect from your coverage. The information you’re looking for is typically listed under Coverage C (personal property protection). If you have trouble finding it, give your agent a call.