Homeowners Insurance: What is Actual Cash Value

Today I’m going to talk to you about actual cash value or ACV. This is one of the other popular ways that your home can be valued on a homeowners insurance policy. So what is actual cash value? Actual cash value means exactly what it sounds like; it’s the actual cash value of an item opposed to what it would cost to replace that item with a brand-new version of the same item.

So, what does that mean? What that means is that if you’re home, the building, the dwelling that you live in, or your personal property is valued at ACV versus replacement costs, you’re going to need to make up the difference between the depreciated value and replacement cost value if you want to replace your belongings or your home.

Say for example your home burns to the ground and your home is valued under ACV versus replacement costs, instead of giving you the money that is going to cost to build you a new home, the insurance company is going to figure in the value minus the depreciated amount. They’re going to consider the age of your home’s walls, roof, floors, lighting, and they’re going take all that into consideration and deduct that from the amount that they’re going to give you towards replacing your home.

The same method applies to your personal belongings when valued using the ACV method. Say you purchase a television and you paid $1000 for it new – three years later it blows up because lightning strikes it, and you call to make a claim because it is a covered loss. The insurance company is probably not going to give you $1000 or they’re not going to give you enough money to get a television of equal value if you chose actual cash value over replacement cost on your policy coverages. They’re going to give you the amount of money that television cost minus its depreciated amount based on the age of the television. So, which is better, replacement cost or ACV?
Almost 90% of the time replacement cost is better for a homeowner. If you’re an investor ACV may work for you. ACV may also work if you’re insuring a second home or vacation home. However, in most cases, you’re going to want to choose replacement cost coverage over actual cash value coverage on your homeowner’s insurance policy.

You can find out more about replacement costs coverage on my last video.