Actual Cash Value vs. Replacement Cost

WRITTEN BY: Julia Matseikovich


The next time you examine the declarations page of an auto insurance policy, be sure to read the fine print to learn how reimbursement will work in the future for property loss. Generally, the declarations page of an insurance policy will explain the difference between the Actual Cash Value vs. Replacement Cost.

This minor distinction may not seem like a big deal now, but the disparity in cash reimbursement may be the difference between being able to replace your vehicle or not.

If you’re not cautious, it’s easy to end up with an insurance policy that won’t replace your car, truck, or SUV at the cost you would have personally valued.

Actual Cash Value Vs. Replacement Cost: An Example

For example, consider Bob Johnson, a fictional character who purchased a $25,000 brand-new car in 2015 worth $16,000 in 2020 due to depreciation, age, and mileage. 

In 2020 Bob was in a car accident that left his 5-year-old car with plenty of life totaled!    

If Bob’s auto-insurance policy states that his auto replacement coverage is based on Actual Cash Value, Bob will get a check for $16,000 to replace his car. 

While $16,000 accurately represents what Mr. Johnson’s car was worth when it crashed, the check will not allow him to purchase a brand new vehicle of equal quality as he did in 2015.

In contrast, if Bob’s auto-insurance policy states that his auto replacement coverage is as Replacement Cost, he will get a check closer to $25,000. Thus allowing him to purchase a new replacement vehicle of a similar make and model to the one that was in an accident. 

After considering this example, you may ask: “Why would anyone choose Actual Cash Value over Replacement Cost?”  The answer always comes down to recurring monthly costs, budget, and value of the insured property. 

Typically, a policy based on Replacement Cost will have steeper premiums, which can turn many buyers away who don’t fully understand the repercussions of an expensive loss. 

How to Calculate Actual Cash Value

To calculate the Actual Cash Value (ACV) of a lost item, subtract depreciation due to wear and tear combined with age from that item’s total original value. Therefore, by definition, the Actual Cash Value of any personal item will be less than the initial purchase cost.

Does that mean that to understand ACV, you have to comprehend depreciation? Yes!

Depreciated Value at the Time of Loss is another way to say Actual Cash Value.

It’s easy to understand depreciation yearly or monthly once you have established a vehicle’s salvaged value. 

For example, suppose you purchase a used Honda Civic for $5,000 that’s worth $1,000 after ten years of wear and tear. In that case, you can calculate the monthly or yearly depreciation by dividing the value by time.

For this example, you would divide $4,000 (the loss in value over time) by ten years or 120 months, giving you an approximate depreciation rate of $400/year or $33.33/month. 

In this example, if your auto insurance policy states that the calculation of replacement is Actual Cash Value, each year that you have owned the hot tub before the loss would subtract $400 from the final check you could receive. 

Because of the impactful depreciation element, Actual Cash Value will often leave a vehicle owner short on cash to purchase a similar product brand new. 

If you don’t mind putting up a bit of your cash to purchase a replacement car, this may not be the end of the world, but for daily essentials such as vehicles or kitchen appliances, this may not be a risk worth taking.

How to Calculate Replacement Cost

In contrast, Replacement Cost (RC) is a simple calculation with Actual Cash Value. Replacement Cost is the payment you would need to make to replace the item lost with a similar make or brand new model, whether a hot tub, piece of furniture, vehicle, or structure.

In the example I used above, Replacement Cost insurance would cover purchasing a $5,000 used car similar to the one you had lost. Replacement Cost takes the element of depreciation entirely off of the table!

While Replacement Cost is considered superior in almost all insurance applications, the premiums can be a bit higher, as previously discussed, depending on the value of the items you are looking to insure. 

If the combination of premium-related expenses surpasses the value of the item insured, you’ll know that the personal belonging is over-protected.

Actual Cash Value Concerns & Considerations

In most cases, a general auto insurance policy will contain language that covers personal property within the vehicle, such as after-market speakers, electronics, golf clubs, and more, under Actual Cash Value settlement terms. 

Depending on the value of the electronics and other after-market parts, it may be worth asking your insurance agent about the upgrade cost from Actual Cash Value to Replacement Cost settlement terms. 

In some cases, especially with cheaper auto insurance policies, the price difference can be merely a hundred dollars a year which may be worth considering depending on your situation. 

Consider this one final example of a larger loss:

Bob Johnson owns an old collectible car purchased 25 years ago for $15,000. Suppose a significant windstorm comes through Bob’s small town and destroys his garage containing the vehicle, which has deteriorated by 25 years of wear and tear. In that case, Bob will rely on his auto insurance for replacement. 

Under an Actual Cash Value insurance policy, Bob may not get any insurance payouts for rare, older vehicles due to the excessive depreciation. He will be responsible for the entire cost of replacing the vehicle.

Below you can find a few important questions to ask yourself before making your final decision on Actual Cash Value vs. Replacement Cost:

  • Are there elements of your vehicle outside their “useful life” defined by your insurance policy? (Ex. Bob Johnson’s Collectible Car)
  • Do you have a lot of expensive replacements, depreciated electronics, or speakers?
  • Do you possess a collectible vehicle that would be difficult to replace or not properly valued in an ACV scenario?
  • Do you have funds to supplement the difference in replacement value?


Is it better to have Actual Cash Value or Replacement Cost?

Replacement cost insurance is a much more advantageous option than cash value coverage. An RCV policy will provide the necessary funds to replace any stolen or damaged vehicles with brand-new ones.

At the same time, actual cash value coverage only covers the vehicle’s depreciated value, resulting in additional out-of-pocket expenses for a full replacement.

Why is Replacement Cost better than Actual Cash Value?

Replacement cost insurance offers full coverage of the value of your vehicle, while actual cash value insurance only covers the depreciation. Consequently, replacement cost insurance enables you to replace your car with sufficient funds.

Can I negotiate Actual Cash Value?

The ACV is contingent upon various elements – such as year, manufacturer, model, vehicle components, mileage, general wear and tear, and accident record. Should you be unwilling to accept the insurance company’s estimation of your automobile’s worth, you may be able to persuade them to provide a larger amount of compensation.

Find help determining if an ACV or RC auto policy is best for you

Understanding Actual Cash Value (ACV) and Replacement Cost (RC) is essential to reading through any Auto Insurance Policy.

But understanding these terms and making the right decision for your unique application is where the difficult choices begin.

Consider the examples we discussed above and imagine yourself in a position of loss to establish your precise insurance needs. 

Call us or fill out our online rate form to view rates from the top insurance companies in your area.