How do insurance companies calculate actual cash value?

Insuring your home and contents is a vital part of any financial plan, but not all insurance policies are created equal. While the vast majority of homeowner’s insurance policies pay out the replacement cost of an item, some policies pay out the “actual cash value” of the item in question.

Understanding key insurance terms like this is pretty important. You don’t want to experience any unpleasant surprises after filing an insurance claim.

What is actual cash value?

Actual cash value is a measurement for payment that insurance policies to determine how much you will receive if a covered item is lost or damaged. This can be applied to many types of insurance policies, including coverage for renters, condo owners, and home owners.

If you have an actual cash value policy, the payment you will receive is based on the value of the item minus any depreciation. Your insurance policy will likely have a definition that states how it calculates ACV.

Many companies define it as “the replacement cost less a deduction that reflects depreciation, age, condition, and obsolescence.” 

In plain language, that means the price that the item would likely garner if you sold it on eBay or at a yard sale. A $2,000 sofa might only be worth $50 after 10 years of constant use. Similarly, a bunch of old clothes stored in your basement could be worthless while the clothes you wear to work each day valued much higher. It is important to remember that you’ll never get the full price you paid for an item through actual cash value, as depreciation will always be applied.

This is twice as important to remember when it comes to car insurance, because those things depreciate quickly.

To determine how an insurance adjuster will place a value on an item following a loss, be sure to read the clause in your contract. If you’re unsure, ask your insurance provider to explain how they deal with ACV.

How does actual cash value differ from replacement cost?

In the simplest of terms, actual cash value pays what an item is worth at the time of the claim, while replacement cost pays the cost to replace the same item at today’s price. This means that if you make a claim for damages to the sofa you paid $2,000 for in 2008, the insurance company may pay $2,500 (accounting for inflation) so that you can replace it with a similar sofa at today’s price.

Similarly, if you own clothing that was ruined by a burst water pipe, your insurer would pay the cost to buy new clothing of a similar quality.

The difference between what you would receive with Actual Cash Value versus Replacement cost can be significant. Be sure you understand the coverage you’re being offered before you commit to a buying or renewing your policy.

Why would I choose actual cash value?

With such major differences between the way Actual Cash Value and Replacement Cost are calculated, why would anyone choose ACV?

The answer is simple: money.

Since an insurer can expect to pay a lot less for a claim on a policy with ACV, they can afford to charge significantly less for that policy. Those savings get passed on to customers who may choose the low price instead of a better replacement option.

For many people, this trade-off makes sense. They are looking for basic coverage and will settle for less money in the event of a claim. But the reality is you get what you paid for, and in the case of insurance, you want to ensure you make that decision having all the facts before you—and that decision should start with a call to your insurance advisor.


Get an accurate 3-minute quote with us to see what your car and home insurance really look like without any confusing industry lingo.

Insuring your home and contents is a vital part of any financial plan, but not all insurance policies are created equal. While the vast majority of homeowner’s insurance policies pay out the replacement cost of an item, some policies pay out the “actual cash value” of the item in question.

Understanding key insurance terms like this is pretty important. You don’t want to experience any unpleasant surprises after filing an insurance claim.

What is actual cash value?

Actual cash value is a measurement for payment that insurance policies to determine how much you will receive if a covered item is lost or damaged. This can be applied to many types of insurance policies, including coverage for renters, condo owners, and home owners.

If you have an actual cash value policy, the payment you will receive is based on the value of the item minus any depreciation. Your insurance policy will likely have a definition that states how it calculates ACV.

Many companies define it as “the replacement cost less a deduction that reflects depreciation, age, condition, and obsolescence.” 

In plain language, that means the price that the item would likely garner if you sold it on eBay or at a yard sale. A $2,000 sofa might only be worth $50 after 10 years of constant use. Similarly, a bunch of old clothes stored in your basement could be worthless while the clothes you wear to work each day valued much higher. It is important to remember that you’ll never get the full price you paid for an item through actual cash value, as depreciation will always be applied.

This is twice as important to remember when it comes to car insurance, because those things depreciate quickly.

To determine how an insurance adjuster will place a value on an item following a loss, be sure to read the clause in your contract. If you’re unsure, ask your insurance provider to explain how they deal with ACV.

How does actual cash value differ from replacement cost?

In the simplest of terms, actual cash value pays what an item is worth at the time of the claim, while replacement cost pays the cost to replace the same item at today’s price. This means that if you make a claim for damages to the sofa you paid $2,000 for in 2008, the insurance company may pay $2,500 (accounting for inflation) so that you can replace it with a similar sofa at today’s price.

Similarly, if you own clothing that was ruined by a burst water pipe, your insurer would pay the cost to buy new clothing of a similar quality.

The difference between what you would receive with Actual Cash Value versus Replacement cost can be significant. Be sure you understand the coverage you’re being offered before you commit to a buying or renewing your policy.

Why would I choose actual cash value?

With such major differences between the way Actual Cash Value and Replacement Cost are calculated, why would anyone choose ACV?

The answer is simple: money.

Since an insurer can expect to pay a lot less for a claim on a policy with ACV, they can afford to charge significantly less for that policy. Those savings get passed on to customers who may choose the low price instead of a better replacement option.

For many people, this trade-off makes sense. They are looking for basic coverage and will settle for less money in the event of a claim. But the reality is you get what you paid for, and in the case of insurance, you want to ensure you make that decision having all the facts before you—and that decision should start with a call to your insurance advisor.


Get an accurate 3-minute quote with us to see what your car and home insurance really look like without any confusing industry lingo.

Seriously, what else can you do in 3 minutes?

Boil half an egg?

You might like these posts, too.

Insurance myths that need to be debunked

Insurance myths that need to be debunked

Home and auto insurance are complicated subjects. There are a lot of difficult words and phrases tossed around that makes it appear that people know what they are talking about. Many falsehoods that are passed around as fact that just don't apply to Ontario's market....

read more
Insurance terms you need to know before buying a house

Insurance terms you need to know before buying a house

You’ve probably heard a few insurance terms already, even if you're not actively looking in the real estate market. But when you’re buying a home, there are some words and phrases we all wish we'd looked up just a little bit sooner. It's all part and parcel of getting...

read more
Insurance savings ideas for couples and newlyweds

Insurance savings ideas for couples and newlyweds

Marriage can be such a beautiful thing. But it also can be a challenge to work through when it comes to talking about money. Finances will change once you have a life partner, making getting a steady insurance plan all the more important whether for your house or car....

read more

How are we doing?

How are we doing?