What is actual cash value?

When your house, car or belongings are destroyed or damaged in a covered event, insurance can help pay to repair or replace them. But how much money will you actually get to cover the loss? It all depends on the type of loss reimbursement on your policy: actual cash value (ACV) or replacement cost value (RCV).

Actual cash value versus replacement cost value

Before we dig into the details of ACV, it'll help to have a quick definition of each policy type.

A replacement cost policy is just what it sounds like. When you experience a loss, your insurer reimburses you the amount needed to replace or rebuild your lost property with a similar new one. So, whether your brand-new car is totaled, a hailstorm wrecks your 10-year-old roof, or a fire destroys your home's original 1992 oven, you can get a brand-new replacement.

Actual cash value takes depreciation into account. Depreciation is the loss in value that happens over the lifespan of an item. So, with an ACV reimbursement, your insurer calculates the replacement value of the item and subtracts the depreciation before sending your payout.

That means if your eight-year-old refrigerator is destroyed in a covered event, you only get reimbursed for the value of the fridge at the time of loss. In other words, the fridge's replacement value minus eight years' worth of wear and tear. If that's enough to cover a new fridge, you're in luck. But if not, you'll have to cover the difference on your own.

So why do people choose ACV over replacement cost in their insurance policies? Usually, ACV policies offer a lower insurance premium. But they can also come with more risk since the actual cash value of your property is usually lower than the replacement cost, which means you pay the difference out of pocket.

No matter which type of loss reimbursement you choose, keep in mind that your deductible will still apply. Typically, your insurer will subtract the deductible before sending your reimbursement.

How is actual cash value calculated?

There are three ways insurers can calculate actual cash value when processing your claim:

1. Subtract depreciation. The traditional method is to simply subtract depreciation, which an IRS formula or scale determines, from the cost of repairing or replacing the damaged item: 
   Replacement cost minus depreciation equals actual cash value.
   
2. Fair market value. This approach looks at the expected price your property would sell for on the open market. For example, if your car is damaged in a collision, how much money could you have sold it for before the accident occurred?
   
3. Broad evidence rule. While not a hard-and-fast formula, the broad evidence rule is a loose framework that considers many factors of value, such as market value, age, condition, frequency of use, replacement cost or rarity. After looking at all the evidence, an insurer can more accurately determine the value of your property.
   
   

Ideally, all three methods would have the same result, but that may not always be the case. For that reason, you may wish to speak with your insurance provider to learn how they typically assess actual cash value for a claim.

Auto policy

When your car is damaged or totaled, your day can be saved by having auto insurance. But how will your insurer determine the actual cash value of your vehicle for an auto claim?

While it might help you to look at the Kelley Blue Book or NADAguides.com to see what to expect, your insurer probably will have their own tool or system for assessing depreciation and ACV. Factors that can influence depreciation and ACV include:

• Make and model year.
• Mileage.
• Pre-loss condition or wear and tear.
• Upgrades, options or add-ons.
• Sales of similar vehicles in your area.
• Salvage value, such as selling the car for parts.

Together, these data points help your insurer determine how much to pay out for your claim.

Homeowners policy

Compared with vehicle claims, the process can be a bit more complicated with homeowners claims. But the overall idea is the same: Your insurer considers the condition of your property prior to the loss, subtracts depreciation, subtracts your deductible and reimburses you.

For claims related to the interior or exterior structure of your home, insurers may consider things like the age of the home, materials used, upgrades or improvements, and pre-loss condition. Your insurer may also request recent photos of your property or even arrange an in-person examination to determine the actual cash value of the loss.

Renters policy

Although it can be trickier to assess ACV for personal belongings, any claims you make will account for depreciation if you select ACV reimbursements with your renters insurance.

As with other ACV reimbursements, your insurer will consider the age of your damaged items, wear and tear, and more. To help your insurer assess the items' value accurately, it may help to have your receipts ready along with recent pictures that show the pre-loss condition of the items.

Be sure you understand the limits of your coverage before it's too late. To get sufficient coverage for valuable possessions like jewelry, cameras or guns, you may need a Valuable Personal Property (VPP) policy.

What does USAA use to determine actual cash value?
It should come as no surprise that the age of the item, whether that be a vehicle, appliance or home structure, is the number one factor USAA uses to calculate depreciation. Unless you take particularly good — or poor — care of your possessions, age is one of the most reliable indicators of an item's condition. That's why it makes sense to rely on an item's age when calculating depreciation.

To accurately value the loss for vehicle claims specifically, USAA uses a vendor database tool called CCC One. The actual cash value will be based on comparable vehicle sales in your geographic area as well as your vehicle's mileage, condition and options.

Keep in mind that depreciation can vary, and some items will depreciate much faster than others. A 3-year-old car is still relatively new, while a 3-year-old cellphone could be nearly obsolete. If you're concerned about the proposed settlement for your damaged item, you'll have the opportunity to provide additional information and documentation before the amount is finalized.