Actual cash value (ACV) is the amount an insurer pays out on a total loss of a piece of property. In homeowners’ insurance, it’s the total payout for your home. Depending on the state and insurer, there may be several ways to calculate the ACV of your home. However, in most cases, it’s a simple equation factoring in the replacement cost and the depreciation of your home.
Calculate the replacement cost of your home, meaning the amount it would cost to build an exact replica of it. Take into account the cost of labor and materials.
Calculate the current depreciation of your home, meaning anything that would bring down the value. Take into consideration the age, wear and tear on the home and any potential repairs.
Subtract the result of Step 2 from Step 1 to determine your home’s actual cash value.
Don’t include the value and depreciation of land in your calculations. Most insurance policies only cover the primary structure with very small provisions for secondary structures and landscaping elements. A separate policy addendum for the land is required and a separate ACV calculated for it.
Don’t assume that the potential sale price of your home and the ACV are the same thing. Remember that market value can vary, depending on supply and demand. For example, a dilapidated building in a trendy area may be sold for a steep price because of its location and the availability of land there. However, the ACV might be much lower because of the specifics of the building structure.
Remember that actual cash value is a very subjective term. It’s possible for three different insurers to calculate actual cash value for a home and come up with three different figures. However, the only calculation that really matters is the one your insurer is using. Always contact your specific home owner’s insurance policy holder to determine what it thinks your home’s ACV is. If you think your insurer's calculation is off, consider contacting a third-party appraiser for a second opinion.