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 your insurance policy explains whether your policy pays out the actual cash value or the replacement cost if you have a total loss.

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 and 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

Are you wondering what the difference is between actual cash value (ACV) and replacement cost (RC)?

It’s actually easier than it sounds.

Actual cash value means if your vehicle is a total loss, your insurance company pays out the total value of the car minus depreciation. In other words, it pays out the value of the car at the time of the loss.

For example, if you purchased a brand-new car in 2018 for $25,000 and in 2023 that same car was worth $16,000 due to depreciation, age, and mileage, your insurance company would pay out $16,000 if you totaled your car.

The $16,000 accurately represents the value of your car at the time of your loss. But it won’t cover the cost of purchasing a brand-new vehicle of equal quality. There’s a gap in coverage.

However, if your car insurance policy pays out the replacement cost, your check would be closer to $25,000 — the original cost of the car. This allows you to purchase a new vehicle of equal value.

After considering this example, you may ask: “Why would anyone choose actual cash value over replacement cost?” 

The answer is simple.

First, replacement cost isn’t an option all insurance companies offer on auto policies because cars depreciate so quickly. And if replacement cost is an option, it comes with a steep premium.

Gap coverage

Now, you might be wondering how to fill the gap between the current value of your car and the amount of money you still owe your lender. After all, if your car insurance policy doesn’t pay anywhere close to the purchase price of your car, you’d end up owing money to your lender and still need to purchase a new car.

Enter gap coverage.

Gap coverage is available to anyone purchasing a brand-new vehicle. It pays the difference between the value of your car at the time of a loss and what you still owe on your loan.

Vehicles depreciate as soon as you drive them off the lot. So if you’re purchasing brand new, be sure to get gap coverage.

How to calculate actual cash value

To calculate the actual cash value 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.

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.

So to calculate monthly and yearly depreciation, 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. 

This means if your auto insurance policy pays out actual cash value for losses, each year that you owned the Honda Civic before the loss would subtract $400 from the final check you could receive. 

How to calculate replacement cost

In contrast, replacement cost is a simpler calculation than actual cash value.

Replacement cost is the payment you would need to make to replace the item lost with a similar make and model of car.

In the example used above, replacement cost insurance would cover purchasing a $5,000 used car similar to the one you had lost. This is because 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 are higher. And replacement cost isn’t usually an option for car insurance policies. 

Custom equipment and parts coverage

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. 

This is common for most car insurance policies. Unfortunately, it often results in after-market parts not being completely covered.

However, you can add custom parts and equipment coverage to your current policy.

In most cases, especially with cheaper auto insurance policies, the price difference from adding the coverage 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’ll 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 custom 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 RC 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 (ACV)?

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 and replacement cost 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.

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