Imagine waking up to a fire in your kitchen. The fridge, the oven, the dishwasher … all gone. You file a claim with your home insurance, hoping to receive enough money to replace them. Instead, you find out you’ll be compensated based on the actual cash value of the appliances. As a result, your payout isn’t enough to buy new replacements for the appliances you lost.
Understanding how actual cash value works can help you decide if it’s enough for you — or if you need to upgrade to more comprehensive coverage.
What is actual cash value?
Also known as depreciated cash value, actual cash value (ACV) coverage pays the cost of replacing your items, minus depreciation. Depreciation is the decrease in value that happens over time as things get older. That means your insurer will take into account the age, condition and wear and tear of your items, and pay you for the current “used” value of those belongings, minus your deductible. Your deductible is the amount of your claim that you’re responsible for paying out of pocket.
In other words, if you have an actual cash value policy, and you file a claim after a loss, your payout may be less than what you originally paid for the damaged item.
How actual cash value works
Personal property coverage
Actual cash value is the most common type of coverage for personal belongings. This includes things like laptops, appliances, electronics, furniture, books, clothes and other belongings.
Suppose a computer you bought for $2,000 two years ago is stolen, and you file a claim with your insurer. If your policy has actual cash value coverage, the insurance company won’t pay you $2,000. Instead, your insurer will calculate the depreciated value of the laptop. If the company calculates the laptop’s actual cash value at around $1,200, that’s what you’ll receive from your insurer, minus your deductible.
If you have ACV coverage and would prefer full replacement coverage for your personal belongings, check with your home insurance agent. You may be able to upgrade to replacement cost insurance.
Dwelling coverage includes your house, garage and other attached structures on your property. Your dwelling is typically covered on a replacement cost basis instead of actual cash value coverage. This means that if your home is damaged or destroyed, the insurance company will pay the cost to repair or rebuild it to its original condition without factoring in depreciation.
A key exception is your roof, which may be covered for actual cash value if it’s older. Say your roof is expected to last 20 years, but a storm rolls through and damages it 10 years after it was installed. If you have ACV coverage, your insurance company would pay out the depreciated value of your roof, minus your deductible.
Review your policy to see what type of coverage you have for your roof and dwelling. Some insurance companies will change your policy to ACV coverage as your roof ages.
Actual cash value vs. replacement cost coverage
One of the most important decisions you’ll make when selecting home insurance coverage is whether to choose actual cash value or replacement cost coverage.
Actual cash value is the amount it would cost to replace your damaged or stolen property, minus depreciation. It’s typically cheaper than replacement cost coverage.
Replacement cost coverage provides you with the full cost to replace your property without any deduction for depreciation. It’s typically more expensive than ACV coverage.
When deciding between ACV and replacement cost coverage, weigh the amount you’ll save on your premiums against how much you could lose in a catastrophe. You may save a few dollars on your monthly premium with actual cash value, but if your house burns down, you could find yourself short by tens of thousands of dollars.