What Is Actual Cash Value, and How Does It Work in Insurance?

Imagine waking up to a fire in your basement. The furniture, the washer/dryer, the pool table … all gone. You file a claim with your home insurance, hoping to receive enough money to replace them. Instead, you learn you’ll be compensated based on their actual cash value. As a result, your payout isn’t enough to buy new replacements for the items 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?

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.

To calculate actual cash value, an insurer will start with an item’s replacement cost. That’s the amount you’d pay for a new item of similar kind and quality.

Next, the insurer will consider how old your item was compared to how long it was expected to last. Say you had a 5-year-old washing machine that was halfway through an expected 10-year lifespan. The insurer might deduct 50% from its replacement cost to reflect depreciation.

Finally, the insurer will subtract your deductible — the part of a claim you pay out of pocket. The final number is how much you’ll get as your claim payout. Here’s an example of how this example might play out with a $500 deductible:

As you can see, actual cash value coverage can leave you far short of the amount you’d need to replace your damaged stuff.

How actual cash value works in a homeowners policy

Two key aspects of home insurance are personal property coverage and dwelling coverage. Let's look at how actual cash value works with both.

Personal property coverage

Actual cash value is often the default type of coverage for personal belongings. These include things like appliances, electronics, furniture and clothes.

However, you may be able to upgrade to replacement cost coverage, a more generous option. With this type of coverage, the insurer will pay the full replacement cost of your items. While your deductible will still apply, the insurer won't factor in depreciation.

So for the washing machine example above, you’d get $700 toward a new appliance ($1,200 - your $500 deductible).

If you’re not sure which type of personal property coverage you have, check your policy or call your agent.

» MORE: What is a homeowners insurance declarations page?

Dwelling coverage

Dwelling coverage includes your house and structures attached to it, like a garage. Most homeowners policies cover your dwelling on a replacement cost basis. So if your home is damaged, the insurer will pay 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. Insurers do this because older roofs are more likely to suffer storm damage leading to claims.

Say your roof is expected to last 20 years, but a hurricane rolls through and damages it 10 years after it was installed. With ACV coverage, your insurance company would pay the depreciated value of your roof, minus your deductible. That could leave you facing thousands of dollars in expenses for a new roof.

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.

» MORE: How much home insurance do you need?

Actual cash value vs. replacement cost coverage

Actual cash value coverage is cheaper than replacement cost coverage, so it’ll save you money on your monthly premiums. However, it could cost you thousands in claim payouts after a catastrophe.

That’s why we recommend choosing replacement cost coverage if you can afford it. It’s especially important if you live in an area at greater risk for severe weather or wildfires. If one of these disasters destroys your house, ACV coverage won’t give you anywhere near enough money to replace what you’ve lost.

To learn more, see our full guide to actual cash value vs. replacement cost.