What Is Actual Cash Value in Home Insurance?

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  • What Is Actual Cash Value in Home Insurance?

When signing up for any type of home insurance policy, you’ll eventually come across the personal property coverage portion of your policy. You’ll be given the option to choose from either actual cash value or replacement cost coverage.

But what does that mean? And why is one coverage increasing your policy premiums? Let’s take a look at what actual cash value coverage is, how it protects you and everything else you need to know about it.

What Is Actual Cash Value in Home Insurance?

Actual cash value (ACV) is a form of coverage you can select to protect your personal belongings if they’re damaged or destroyed by a covered peril. Under ACV, your insurer will calculate their value using depreciation and other factors to determine how much they will reimburse you for an item.

So a couch that you bought five years ago for $4,000 will not be worth that same amount if it were destroyed by water damage. Instead, after filing a home insurance claim, your insurer will send an adjuster to your home to survey the damage.

That insurance claims adjuster is responsible for determining your claim payout. They’ll first want to know how much you paid for the couch, which is why compiling a home inventory list is extremely important.

They’ll look at the price you paid for the couch, the wear and tear it has before being damaged, the average lifespan of a similar couch and what a similar one is worth on the open market. They’ll then utilize that information to determine what a similar replacement couch would cost, and that’s the value of your couch in the eyes of your insurer.

Since actual cash value is located under your personal property coverage, it protects all the personal belongings you keep inside your home or on your property. Examples of these belongings include furniture, electronics, clothes, kitchen utensils and appliances, sports equipment, tools and even lawnmowers.

With actual cash value coverage, you’ll probably never get reimbursed the amount you originally paid for any item — unless it’s something like a collectible and has been properly scheduled on your policy.

But, for your personal belongings to be covered, they had to have been damaged or destroyed by a covered peril and your insurer must accept your home insurance claim. Some of the most commonly filed home insurance claims are for damages caused by the following instances:

  • Hurricanes, tornadoes and other windstorms
  • Water damage caused by events other than floods
  • House fires or smoke damage
  • Theft or vandalism
  • Damage caused by lightning or electrical currents

What Is ACV in Insurance?

ACV in insurance is just an abbreviation for the term “actual cash value.” Whether it’s in your policy documents, an email from your agent or somewhere else, anytime you see ACV in insurance-related terminology, you can safely assume the abbreviation is referring to actual cash value.

What Does Actual Cash Value Mean?

In insurance terms, actual cash value simply means determining as to what the item was worth on the open market before it was damaged or destroyed by a covered peril. Obviously, this amount will be calculated prior to the damage. But any signs of wear and tear will be taken into account.

How Is Actual Cash Value Determined by Insurance Companies?

Although there’s no singular formula used by the insurance industry as a whole, the most common way to calculate the actual cash value of an item is by taking its original purchase price, determining the lifespan of the item and multiplying by the number of years you had it in a percentage-based equation (initial cost x 0.5 = ACV payout).

Let’s use the previous example of the $4,000 couch. For round numbers, let’s say the couch was purchased five years ago and your insurer deems the lifespan of a couch to be 10 years.

In that case, your couch was already through 50% of its lifespan, so you’d only be reimbursed $2,000. The simple math formula would take the initial amount and multiply it by the lifespan to get its value ($4,000 x 0.5 = $2,000).

Now let’s look at a laptop. Let’s say the laptop was purchased three years ago for $2,000 and your insurer deems the lifespan of a laptop to be eight years. In that case, you could divide three years by eight years to find its used up lifespan (3 / 8 = 0.375).

You’d then subtract that number by 1 to find the lifespan it had remaining (1 – 0.375 = 0.625). Multiply the remaining lifespan by the original purchase price to find the payout, which would be $1,250 ($2,000 x 0.625 = $1,250).

However, if the one item was the only thing that was damaged, it may not be worth filing a claim. You still have to pay your deductible and that claim would likely increase your insurance premiums. If your deductible were $1,000 or even $500, you may want to consider paying out of pocket to avoid the premium hike.

But if many of your belongings were damaged in an accident like a burst pipe, it would likely make more sense to file a claim to replace all the affected belongings. After all, that’s what insurance is for.

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The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.