Actual Cash Value | How it Works for Home Insurance?


Triston Martin

Dec 06, 2021

A home is one of the most substantial investments a person makes in his/ her lifetime. An insurance policy is a great cushion for you and your investment in unanticipated situations. A home insurance policy is compensation for rebuilding or repairing your home contents in case of insured disasters.

- About 85% of homes are insured in America as per National Association of Insurance Commissioners.

Home interior and exterior (appliances, clothing, furniture, and other home contents) are covered in standard insurance policies in cases of damage (lightning, fire, hurricanes, and other insured disasters).

Additional premiums/ separate policies are needed to be bought for additional protections, for instance:

» Other disasters (floods, earthquakes)

» High-end possessions (luxury clothes, art pieces, jewelry)

Home insurance may also be demanded by a mortgage company in case you have a mortgage. It is because a lender wants to ensure your credibility and the fortification of his/ her financial investment!

A standard homeowner’s coverage has 3 following levels, and we’ll be discussing ACV coverage, calculation, and application in detail:

¯ Actual Cash Value (ACV)

¯ Replacement Cost, also called Replacement Cost Value (RCV)

¯ Guaranteed (or Extended) Replacement Cost/ Value

Replacement Cost: Unlike ACV, this kind of insurance helps the homeowner in covering the costs of rebuilding a home or replacing damaged items without considering depreciation.

E.g., you purchased a desktop computer 3 years ago, this insurance would offer a payout for a similar product replacement at today’s purchase price.

Guaranteed (or Extended) Replacement Cost/ Value: It is an expanded version of replacement cost insurance. It covers the rebuilding or replacing expenses even if it exceeds estimated home value. The ceiling is 20% to 25% higher than the limit generally.

Actual Cash Value (ACV)

What does actual cash value mean on homeowners’ policy?

An ACV insurance policy covers the cost of a home and its contents based on their current worth – insurers calculate the depreciated value of the product – and not based on their purchase price.

In general, the actual cash value of home insurance is less pricey due to lower claim payments and the depreciation factor.

In simple words, the actual cash value definition means you would be getting the present worth of insured property instead of the replacement cost.

î ACV vs. MV

Well, a market value is the current worth of the property in the financial market. E.g., the market value of a home would be determined by the selling price of a similar home sold in that area lately.

However, oftentimes actual cash value of a home may be much lower due to the depreciation factor.

- The average cost of home insurance per month is $109 monthly. (Nov 2021)

How Is Actual Cash Value Calculated?

ACV does not cover all the repair costs of damage. The actual cash value coverage is calculated by subtracting depreciation cost from the replacement cost.

Actual Cash Value Calculator

ACV = Replacement Cost * [Estimated Life Span - Current Life Span] / Estimated Life Span

Who determines actual cash value?

The actual cash value of damaged property is usually estimated by an insurance adjuster. He/ she may also physically examine the product. They estimate depreciation based on age, type, and some other factors.

Actual Cash Value Example

How is actual cash value determined by insurance companies? For instance, you bought a television set 2 years ago and it is damaged to the extent that it cannot be repaired. Its actual cash value is determined by the following factors:

Ù Say the estimated life span of that TV is 8 years.

Ù The replacement cost of the television set is $2,300.

ACV = $2,300 * [8-2] / 8

ACV = $1,725

Bought 2 years ago with a lifespan of 8 years, the TV’s depreciated amount is $575 (25% of $2,300). And replacement cost minus depreciation cost equals $1,725: the actual cash value of this TV.


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