What Is Actual Cash Value (ACV) in Home Insurance?

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When purchasing homeowners insurance, you will hear the terms “actual cash value” and “replacement cost”. Actual Present Value and Replacement Cost are both coverage options that determine how your insurer will reimburse you for an approved claim.

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

What you need to know about the actual cash value in homeowners insurance:

What is the actual cash value in home insurance?

Actual Present Value (ACV) is the amount of money that would be needed to repair or replace your home or personal property, less depreciation. Depreciation accounts for age and use, so at actual present value, your insurance carrier accounts for the cost of replacing your home or property at current value.

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

How Does Actual Present Value Work?

When you make a claim, an insurance adjuster will conduct an inspection and determine how much your insurance should pay out. To determine the actual present value of your home or property, the appraiser will subtract the depreciation from the replacement cost. Depreciation is how much value an item loses each year.

Example: Let’s say a storm destroys your washer and dryer. They 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) every year. Over five years, your washer and dryer are worth $750. In this case, your insurance carrier would pay $750 to replace the set ($1,500 – $750).

Learn more: Home insurance: everything you need to know

Actual present value vs. replacement cost

If you choose replacement cost coverage, your insurer will reimburse you to replace your property with a new one of equal value. While you get more coverage this way, you also pay more for it.

Here’s a comparison of actual present value and replacement cost:

cover type bonus payout claim process best for
Current monetary value Less expensive Based on the cost of replacing items, allowing for depreciation The insurer will calculate current value by subtracting depreciation – a home inventory and receipts will help Homeowners who want lower premiums and homeowners who are okay with purchasing older replacements
replacement cost Expensive Pays the amount to replace the item with a new one at today’s prices Can receive two payments, one for actual cash value and another for the difference between ACV and replacement cost once you provide receipts Homeowners willing to pay a higher premium for more coverage
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Actual present value versus recoverable depreciation

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

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

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Other types of replacement cost coverage

Depending on your insurance carrier, you may be able to choose from a few different replacement cost coverage options.

Here’s a quick look at three other types of replacement costs you can purchase:

cover type what it covers Generally available? best for
market value coverage The total cost of buying the house and land in its current condition Yes, but it is not recommended Homeowners who can bridge any gap between market value and the actual cost of rebuilding their home
Advanced replacement
Covers an additional 10% to 50% above your replacement cost coverage to offset rising labor/material costs Yes Best for homeowners living in high risk areas for natural disasters; Homeowners who want more security and can afford to add a tab to their home insurance
Guaranteed replacement cost Covers the cost of repairs or modifications, even if the cost exceeds your coverage limits No, not all insurance carriers offer a guaranteed replacement cost tab Homeowners who want peace of mind and can afford to pay more for more coverage

When should you insure your home at fair value?

True cash value policies can be a good option if you want to save money on your home insurance and risk getting less money in the event of a disaster.

An ACV policy can also make sense if you own a newer home that hasn’t had much time to write off. Because you can review and change your homeowners insurance policy later, you may be prepared for a more comprehensive policy in the future.

If you choose home insurance with real cash value, consider adding tabs to cover irreplaceable personal items (like expensive heirlooms).

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About the author

Angela Brown

Angela Brown

Angela Brown is a student loan, personal finance and real estate agency and a Credible contributor. Her work has appeared in Fox Business, LendingTree, FinanceBuzz and Yahoo Finance.

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