Is it better to have actual cash value or replacement cost?

Posted in General, Auto, Home

A man in shorts and a t shirt smiles while he washes the side of his black vehicle with a soapy rag.

As an auto or home policyholder, many of us forgo reading the fine print when it comes to our policies. We rely on our independent agent to help us choose the right coverage based on our needs. However, as you meet with your agent, you may want to discuss what your current policy covers so you are not surprised if you file a claim.

Learn the difference between actual cash value and replacement cost to make sure your home insurance or auto insurance policies reflect the way you want personal property replacement handled in the event of a claim. We’ll cover the pros and cons of each so you can tell your independent agent exactly what you’re looking for. 

Actual Cash Value

What does actual cash value (ACV) mean?

Actual cash value is the cost to replace or repair an item that is accidently damaged, destroyed or stolen, minus depreciation. Depreciation accounts for normal wear and tear of an item over time. To calculate actual cash value, you’ll follow this equation: 

Cost Brand New – Depreciation = Actual Cash Value 

We’ll use an example scenario to help paint the picture. Let’s say in 2019 you bought a brand new Toyota Camry for $26,000. Fast-forward to today, you are in an auto accident and your car is completely totaled. You file a claim with your insurance company and they decide your car is a complete loss (you can’t drive it and it can’t be salvaged). Under your insurance policy with actual cash value coverage, the insurance company offers you a settlement of $12,300, which covers the cost of what the vehicle was worth prior to the accident. Keep in mind, this total is what is left after you’ve met your deductible.

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Why are auto policies typically ACV?

You’ll find actual cash value is common in auto insurance policies because a vehicle’s value and condition depreciates quickly. Like the saying goes, your car loses value when you drive it off the lot. According to Lending Tree, your brand new car can depreciate as much as 20% in the first year you own it.

The pros and cons of actual cash value

Actual cash value is not a one-size-fits-all approach. You may prefer actual cash value in some of your insurance policies, but not all. Here are some pros and cons to help you weigh your options:


  • May cover assets that appreciate value, such as artwork.
  • May cover assets that are newer and have not yet lost value, such as a living room couch you purchased a few months ago.
  • May be a lower out-of-pocket premium than replacement cost policies.


  • Will likely not cover your total original investment, especially those lost that depreciate quickly like electronics.
  • For some insurance coverage, like an auto policy, actual cash value is your only option.

Replacement Cost

What does replacement cost mean?

Replacement cost is the price to replace or repair an item that is accidently damaged, destroyed or stolen, at what it costs to replace today. Depreciation is not a factor. To calculate replacement cost, you’ll follow this equation:

Cost Brand New = Replacement Cost

Let’s use another scenario as an example. In this instance, you just got back to your home after a weekend away. You discover your home was burglarized and your two upholstered chairs were stolen. You file a claim with your insurance company and because you have replacement cost on your homeowners insurance policy, you have coverage up to the cost to replace the chairs today.

The pros and cons of replacement cost

Getting equal or better (newer) replacements for your lost personal property can sometimes make the loss easier to swallow. However, there are limitations for replacement cost claims. Here are some of the pros and cons:


  • May be applied to your home if it’s a covered peril.
  • May be applied to your personal belongings if they are covered perils.


  • Is restricted to the coverage limits on your policy.
  • Is restricted by types of coverages within your policy, such as dwelling replacement cost.
  • May be a higher out-of-pocket premium than actual cash value policies.
  • May be paid out as actual cash value until the item is replaced. Then, a second payment with the depreciation value will follow.

Ask your independent agent for more help

Actual cash value and replacement cost can get a bit confusing, but your independent agent will know what is best for you. Call your Integrity Independent Agent today to review your auto and home policies.


Coverages described herein may not be available in all states. Please contact a local independent Integrity agent for complete details on coverages and discounts. If the policy coverage descriptions herein conflict with the language in the policy, the language in the policy applies. For the coverage to apply, a claim must be made and reported during the policy period. Scenarios above are not actual claims. The material provided above is for informational, educational, or suggestion purposes and does not imply coverage. WE RESERVE THE RIGHT TO REFUSE TO QUOTE ANY INDIVIDUAL PREMIUM RATE FOR THE INSURANCE HEREIN ADVERTISED. Integrity Insurance policies are underwritten by Integrity Insurance Company, an affiliate of Grange Insurance Company, and Integrity’s subsidiaries. Integrity companies not licensed in Pennsylvania. Not all Integrity companies are licensed in all states.

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