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Actual Cash Value vs. Replacement Cost: How Car Insurance Companies Value Your Car

Published December 21, 2021
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This article has been reviewed by licensed insurance industry expert, Moshe Fishman.

When shopping for car insurance, you will likely come across the terms "actual cash value" and "replacement cost." Understanding the difference between these two concepts is essential as they can significantly impact your wallet in the event of an accident.

Car insurance companies base their premiums on actuarial data that tells them how likely you are to submit a claim and the kind of claims you're most likely to file. You can think of your car as a unique risk based on its age, make, and model, combined with factors related to you, such as your personal driving history, credit score, and location.

So, when the insurance company calculates your premiums, it will also factor in things like the cost of parts and labor if your car needs to be repaired or replaced. Generally, the company will estimate the value of your vehicle based on what's called the "actual cash value" (ACV) of your car and is the most commonly used method for insurance companies to determine value. But, there is a different way to estimate the cost of your value, known as "replacement cost." Here is a breakdown of the differences between the two that can help you better understand how insurance companies value your car.

What is Actual Cash Value?

Actual cash value (ACV) is a standard provision in car insurance contracts and is what your insurance company would pay you if you totaled your car today.

Under this type of policy, a vehicle's insured value equals its current market value. So, if your totaled car is worth $10,000 and it's been driven for five years, the ACV would be $10,000 minus the amount of depreciation over time.

The depreciated amount represents the actual cash value from the year's initial purchase date. For example, if your car costs $20,000 new but is now worth only $10,000, your car's insured value would be $10,000. Although taking good care of your vehicle can maintain its value, it won't significantly change or increase the ACV.

How does my insurance company come up with this value?

The first step is for your insurance company to send out an appraiser. This appraiser will look at your car and assign it a value based on a few factors, including make, model, year, condition, and mileage.

Once the appraiser has assigned a value to your car, your insurance provider will likely use it as the ACV determination for your policy. However, this is not always the case. Your insurance company may use a different value based on other factors such as state regulations or internal policies.

No matter the value your insurance company assigns to your car, it's important to remember that this is not always the final say. If you believe that your vehicle is worth more than what they have assigned, you always have the right to appeal.

How do I negotiate my car's ACV?

If you do choose to appeal your ACV, it's important to remember that this can sometimes be a long process. If your insurance company does not agree with the amount that you are asking for, they will most likely require you to go through an appraisal by an independent appraiser of their choosing.

The definition of ACV is the actual worth in cash value of an object or property at the time of loss or damage (not counting repairs or upgrades). That means that if you have a car that's ten years old and it's in a wreck, the insurance company will not pay to have it replaced with a brand new car. They will only pay to have it repaired to its pre-loss condition, and the value of it at that point is what you would get for your settlement.

ACV coverage pays the current market value of your car minus your deductible. For example, if your vehicle is totaled and it's worth $10,000 on the open market, but you still owe $15,000 on your car loan, ACV will only pay $5,000 (the $10,000 market value minus your $5,000 deductible), and the rest goes towards paying down your car loan.

What if I still owe money on my loan?

Gap insurance is a wise investment for people who are upside down on their car loans and want to avoid paying out of pocket for a totaled car. This type of optional car insurance covers the difference between the actual cash value of your vehicle and the amount you still owe on your car loan. For example, if you have a car with an ACV of $10,000 but still owe $15,000 on your loan, gap insurance will cover the $5,000 difference (minus your deductible).

What is Replacement Cost Coverage?

Replacement cost is an alternative to ACV and is a complete form of insurance that will pay to replace your car if it is totaled in an accident or stolen.

Insurance companies will typically review cars similar to yours on the market to determine the replacement cost. The difference between the ACV and replacement cost is that an estimate for how much the vehicle would be worth if you tried to replace it today includes factors like inflation.

How does my insurance company come up with this value?

Under a replacement cost policy, the insurer agrees to pay the total cost of replacing the vehicle with a new one of a similar make and model. This is usually done through a lump sum payment to the policyholder or by financing and paying monthly.

Replacement cost coverage pays to replace your vehicle with a brand-new one, minus your deductible. If you opt for replacement cost value instead of ACV, if your car is totaled, it will be paid off using the full purchase price of a new one, minus your deductible.

If you're thinking about purchasing replacement cost coverage, consider that this will typically result in higher premiums than ACV.

Which one is right for me?

The benefits of choosing between ACV or RCV coverage depend on the amount you still owe on your car and your account's current value compared to what it was when you purchased it.

Of course, as with any type of car insurance, there are pros and cons to choosing replacement cost value over ACV. The main pro is that if your car is totaled, you'll receive the full purchase price of a new one minus your deductible. The main con is that replacement cost insurance is more expensive than its counterpart.

If you're still paying off your car loan, opting for ACV coverage may be a better option, as the insurance company will pay off the remainder of your car loan using the car's current market value. If your vehicle is paid off, replacement cost coverage may be a better option, as you'll receive the total purchase price of a new car minus your deductible.

In short, car insurance companies sell two kinds of coverage: actual cash value (ACV) and replacement cost value (RCV). The main difference is what car insurance companies will pay if your car is totaled.

Actual Cash Value is what your car is worth at any given time, based on its age and condition, factoring in depreciation. On the other hand, replacement cost is what it would cost to replace your car with a brand new one of the same make and model. Depending on your individual situation, one type of coverage may be more advantageous than the other so be sure to consider all the different factors before making a decision.

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