What Does Actual Cash Value Mean?

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Written by Margaret Wack Edited by Nick Versaw

Updated June 15th, 2023

The minute you drive your brand-new car off the lot after purchasing it, it begins to depreciate in value. This means that if you’re unlucky enough to get into an accident that totals your car, your insurance company won’t cover the amount you paid the dealer when you bought your car. Instead, they’ll only pay for the actual cash value of your car, which takes depreciation into account. We’ll cover how actual cash value works, why it’s important, and what to expect when filing an insurance claim.

Actual Cash Value vs. Replacement Cost: What’s the Difference?

Actual cash value and replacement cost are two different ways insurance companies calculate how much to reimburse their customers after a claim.

Actual Cash Value

The actual cash value refers to the current value of an item, such as your car. Common types of property insurance that reimburse customers for the actual cash value of damaged property include car insurance, homeowner’s insurance, and renters insurance. If you have actual cash value insurance coverage, your car insurance company will issue a payout after a claim that covers the current value of your damaged items. Most common insurable items, including cars, electronics, and household appliances, decrease in value over time, meaning the actual cash value is less than the replacement cost.

Replacement Cost

Some insurance policies, such as a home insurance policy, give policyholders the option to purchase replacement cost coverage for their personal property instead of actual cash value coverage. Like it sounds, the replacement cost value refers to how much it will cost to purchase a comparable new item in current-day dollars. For example, if a fire damages your dishwasher and you need to buy a new one, replacement cost coverage will reimburse you for the cost of a new dishwasher, not just how much your dishwasher was worth before it was damaged.

Auto insurance companies generally do not reimburse customers for the total cost they paid when purchasing a vehicle. Since cars depreciate in value immediately after purchase, the actual cash value for a vehicle is almost always lower than the replacement cost of buying a new car.

What is the Actual Cash Value of My Car?

The actual cash value of your car depends on various factors, including the car’s make and model, how much you paid for it, and how much it has depreciated since your purchase. Insurers calculate your vehicle’s actual cash value by using the original cost of the car minus depreciation.

For example, if your car was worth $30,000 when you bought it and it has depreciated by $10,000, your actual cash value is $20,000—depending on your coverage limits, deductible, and the details of your insurance policy, this is the most that your insurance company will pay out for a claim before the car is considered totaled.

Cars depreciate by 20% on average in their first year, after which they continue to depreciate about 10-15% per year. But depreciation is also affected by factors like how many miles you’ve driven, whether you’ve been in any accidents, and the general condition of the exterior and interior of the car. The better shape your car is in, the more it’s worth, which will increase the actual cash value.

Actual Cash Value and Your Insurance Policy

As long as you have adequate coverage in the form of collision coverage, auto insurance policies generally reimburse you for the actual cash value of your vehicle in the event of a total loss, which is when the cost to repair your car is more than the value of your vehicle. The amount of money you’ll get from the insurance company to fix or replace your car depends on the valuation of your vehicle before the accident.

If you’re in a serious accident that doesn’t result in a total loss, your actual cash value is still important because it sets the limit for how much an insurance company will pay you. After an accident, your adjuster and insurance agent will let you know how much you can expect to receive from the insurance company for your claim.

Actual Cash Value and Collision Insurance

The actual cash value of your vehicle is the default coverage limit if you decide to purchase collision insurance. Collision insurance, which is usually optional if you own your car outright, covers damage to your own vehicle after an accident.

When purchasing collision insurance, you’ll also need to choose a deductible. The deductible refers to how much you’ll pay out of pocket before insurance kicks in. For example, if you’re in an accident and need $1,000 in repairs, a deductible of $200 means you’ll need to pay $200 in cash before your insurance will cover the rest.

Actual Cash Value and Comprehensive Insurance

Similar to collision insurance, comprehensive insurance is usually optional, and the default coverage limit is the actual cash value of your car. Comprehensive insurance covers damage to your vehicle that is not the result of an accident. For example, if your catalytic converter is stolen, comprehensive insurance will cover the cost of repairs and a replacement part.

Also like collision insurance, you’ll need to choose a deductible for your comprehensive insurance policy. Be mindful of the actual cash value when choosing a deductible; the ACV should always be significantly higher than your deductible in order for this type of coverage to make sense.

Using Actual Cash Value to Determine Your Coverage Needs

Your actual cash value can also help you to determine whether or not you need collision or comprehensive insurance in the first place. If you have an older vehicle that’s dropped in value, it may not be worth purchasing these types of coverage for your car. For example, if your vehicle is only worth $2,000, insurance won’t cover more than $2,000 in repairs to the car. This means you’ll likely need to buy a new car after a serious accident, despite paying for comprehensive or collision insurance.

When deciding what types of auto insurance coverage you need, you should weigh the potential payout against the increase in your monthly premiums to determine what type of coverage is right for you.

Make Sure You Have the Coverage You Need

At their most basic, many insurance policies only need to offer liability insurance to satisfy a state’s minimum insurance requirements. But in most cases, it’s a good idea to exceed those requirements in order to have the coverage you need in the case of an accident. For example, comprehensive and collision coverage are usually optional unless you’re leasing a vehicle or still paying off an auto loan. But for many drivers, this type of coverage can mean the difference between being able to afford an unexpected auto repair or not.

Want to learn more about car insurance? Check out Compare.com’s library of resources to find out ways to save on car insurance, what types of coverage you need, and how to get the best deal possible when shopping for a plan.

Margaret Wack Insurance Writer

Margaret Wack is an auto insurance writer for Compare.com. She has written about insurance and personal finance for brands and publications including Investopedia, Bankrate, MoneyGeek, The Insurance Bulletin, and more. Margaret earned a bachelor's degree in classics, comparative literature, and poetry from Smith College and an interdisciplinary master's degree from St. John's College.