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.
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Answer a few questions to see custom quotes and find the right policy for you. 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:
| Cost of new washing machine | $1,200 |
| Minus 50% depreciation | - $600 |
| Minus deductible | - $500 |
| Final claim payout | = $100 |
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.
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.
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.
| Actual cash value | Replacement cost | |
|---|---|---|
| Cost | Cheaper. | More expensive. |
| Claim payouts | Replacement cost minus depreciation and deductible. | Replacement cost minus deductible. |
| Consider if... |
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To learn more, see our full guide to actual cash value vs. replacement cost.
Frequently Asked Questions
What is recoverable depreciation?
Recoverable depreciation is the difference between an item’s actual cash value and its replacement cost. If you have replacement cost coverage, an insurer won’t pay you the full value of the item until you actually replace it. First, it’ll send you the actual cash value of the item. Once you’ve bought a new one, you’ll submit your receipt and get a second payment to cover the difference. The amount of that second payment is recoverable depreciation.
Do I have to accept my insurer’s actual cash value calculation?
Not necessarily. Maybe you think the insurer’s replacement cost estimate is too low, or it’s taking too much off for depreciation. You can dispute this by submitting photos, receipts and other documents to show the quality and condition of your property. Consider working with a public adjuster to help with larger claim disputes.
Which is better: replacement cost or actual cash value coverage?
While actual cash value coverage is cheaper, replacement cost is the better coverage option. It’ll give you more money after a claim to help you recover financially.
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