What is actual cash value (ACV) in home insurance?

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When shopping for home insurance, you’ll hear the terms “actual cash value” and “replacement cost.” Actual cash value and replacement cost are two coverage options that determine how your insurer reimburses you for an approved claim.

Although the two terms refer to an insurance payment, they are not identical. The coverage option you choose will also affect the cost of your policy.

Here’s what you need to know about the actual cash value of home insurance:

What is the actual cash value of home insurance?

Actual cash value (ACV) is the amount of money it would take to repair or replace your home or personal property, minus depreciation. Depreciation takes into account age and use, so with actual cash value, your insurance company considers the cost of replacing your home or property at its current value.

Example: If your sofa is destroyed in a fire, an actual cash value policy would pay you what the sofa is currently worth given its age and condition – not the amount of money you would need to buy the same sofa brand new.

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How does actual cash value work?

When you file a claim, an adjuster will perform an inspection and determine how much your insurance provider should pay. To determine the actual cash value of your home or possessions, the adjuster will subtract depreciation from the replacement cost. Depreciation is the value that an item loses each year.

Example: Suppose a windstorm destroys your washer and dryer. You bought the set five years ago for $1,500. The average lifespan of a washer and dryer is about 10 years, which means the set depreciates by 10% ($150) each year. Over five years, your washer and dryer are worth $750. In this case, your insurance company would pay $750 to replace the set ($1,500 – $750).

Learn more: Guide to home insurance: everything you need to know

Actual cash value versus replacement cost

If you choose cost-new coverage, your insurer will reimburse you for the amount needed to replace your property with new one of similar value. While you’ll get more coverage this way, you’ll also pay more.

Here is a comparison of actual cash value and replacement cost:

Type of coverage Prime Payment Claims process Best for
Actual Cash Value Cheaper Based on the cost of replacing the items, taking into account depreciation Insurer calculates current value by subtracting depreciation – home inventory and receipts are helpful Owners who want lower premiums and owners who are willing to purchase older replacement items
Replacement cost More expensive Pay the amount to replace the item with a new one at today’s price Can receive two payments, one for the actual cash value and another for the difference between the ACV and the replacement cost once you provide receipts Owners willing to pay a higher premium for more coverage

Actual Cash Value vs. Recoverable Depreciation

Recoverable depreciation is the difference between the replacement cost of an item and its actual cash value. If you have replacement value coverage, your insurer will issue payment for the actual cash value of your damaged property, minus your deductible. To receive the full replacement cost, you must provide receipts or a signed contract to prove the replacement is complete and you need more money to cover it.

Let’s take the same example of the washer and dryer above, with a depreciated value of $750. If you go out and buy the same set (or a very similar set) for $2,000, recoverable depreciation will pay the $1,250 difference after you provide the receipt to your insurer.

Check: Everything you need to know about home insurance claims

Other types of replacement cost coverage

Depending on your insurance company, you may be able to choose from several replacement cost coverage options.

Here’s a quick look at three other replacement cost types you can buy:

Type of coverage What it covers Commonly available? Best for
Market value coverage The total purchase cost of the house and land in its current condition Yes, but it is not recommended Homeowners who can cover any gap between the market value and the actual cost of rebuilding their home
Extended replacement
Cost
Covers an additional 10% to 50% above your replacement cost coverage to account for increased labor/material costs Yes Ideal for homeowners who live in areas at high risk of natural disasters; homeowners who want extra peace of mind and can afford to add an endorsement to their home insurance policy
Guaranteed replacement cost Covers the cost of repairs or reconstruction even if the cost exceeds your coverage limits No, not all insurance companies offer a guaranteed replacement cost endorsement. Homeowners who want peace of mind and can afford to pay more for more coverage

When should you insure your home for its actual cash value?

Cash value policies can be a good option if you want to save money on your home insurance and are comfortable with the risk of receiving less money in the event of a disaster.

An ACV policy can also be useful if you own a newer home that hasn’t had much time to depreciate. Since you can review and make changes to your home insurance policy later, you might adjust to a more comprehensive policy in the future.

If you opt for an actual cash value home insurance policy, consider adding endorsements to cover irreplaceable personal items (like expensive heirlooms).

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Disclaimer: All insurance related services are provided by Young Alfred.

Keep reading: How to get home insurance

About the Author

Angela Brown

Angela Brown is a student loans, personal finance and real estate authority and contributor to Credible. His work has appeared in Fox Business, LendingTree, FinanceBuzz and Yahoo Finance.

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