The actual cash value of a car is the price you’d expect to fetch if you sold the vehicle today. It’s different from the replacement cost of a vehicle, which is the amount you’d pay for a car of the same make and model, because it factors in car depreciation. If your vehicle is declared a total loss, a car insurance company will usually reimburse you based on the vehicle’s actual cash value, rather than its replacement cost.

Actual cash value vs. replacement cost of a vehicle

If your car is damaged in an accident and repairs would cost more than the vehicle is worth, a car insurance company will deem the vehicle a total loss. There are two ways to calculate how much a vehicle is worth:

• Actual cash value (ACV): The market value of your vehicle when you factor in car depreciation or the continual decrease in a car’s value that occurs over time. Essentially, ACV is your car’s current market value.

• Replacement cost value (RCV): The amount it would cost to replace your car with a vehicle of the same make and model. Because car depreciation begins the moment you drive your vehicle home from the dealership, replacement cost value is almost always higher than actual cash value.

Most auto insurance policies base reimbursement on the actual cash value of your car, minus your car insurance deductible. For example, if you bought a car for $30,000 and it has depreciated to $20,000. If it’s totaled in a wreck and you have a $1,000 deductible, your insurance company would probably cut a check for $19,000 ($20,000 ACV - $1,000 deductible). If your car is financed, the money will go to your lender to put toward your loan balance. However, you’ll receive the payout if you own your car outright.

The fact that most auto policies only provide the actual cash value for a totaled car can spell bad news if you owe a significant amount of money on your car. You’re still responsible for paying off your car loan in full if the insurance reimbursement doesn’t cover the full amount you owe. That could mean you still need to make payments on a car you’re no longer driving.

Situations when each one applies

Replacement cost value is more commonly used in homeowners insurance than auto insurance. Many insurance companies insure a home’s structure for up to its RCV and offer homeowners the option of insuring their belongings for the ACV or the RCV. (Not surprisingly, you’ll pay higher premiums if you choose replacement cost value coverage, as your belongings will be insured at a higher level).

In order for your auto insurance company to cover your vehicle’s replacement cost value, you’ll need to have new car replacement coverage. Not all auto insurance companies offer this coverage, but those that do often have strict rules. For example, some insurers will only pay to replace your vehicle if it has fewer than 25,000 miles on it or it’s less than two years old.

An alternative if you owe money on your car is to purchase gap insurance. This type of insurance coverage provides a payout for the difference between your car’s actual cash value and the amount you owe. Many lenders require gap coverage in the early years of a car loan if you finance your vehicle with little money down or if you have a lease.

Which is better?

If your car is destroyed or stolen, it would be better to have your insurance company reimburse you for the car’s replacement cost value, but most insurance companies base your payout on the car’s actual cash value. You typically don’t get to choose. New car replacement insurance can qualify you for the higher payout, but it’s not available for every car.

How insurance companies determine actual cash value

An insurance adjuster considers your car’s value based on comparable vehicles in your location. But in order to determine the car’s actual cash value, the insurance company also needs to calculate your vehicle’s depreciation. Several factors determine car depreciation, including:

• Car’s age

• Mileage

• Make and model

• Condition immediately before the accident

• Whether it’s been involved in past accidents

• Ownership history

There’s no single formula for determining actual cash value. Many insurers use proprietary formulas or software from a third-party vendor to calculate ACV.

It’s possible to negotiate your vehicle’s ACV if you disagree with the insurance adjuster’s estimate. You can ask your car insurance company for a total loss valuation report that shows the data it used for comparable vehicles to calculate your automobile’s actual cash value.

If you disagree with the insurer’s assessment, be prepared to provide supporting evidence. Websites like Kelley Blue Book and Edmunds can be helpful in estimating the valuation of your vehicle. You could also look at the pricing of similar vehicles at local car dealerships. Any documentation you have about your vehicle’s current condition will be helpful.

You may have the option to hire an independent appraiser if your car insurance policy contains an appraisal provision. If your appraiser calculates a higher ACV than your insurer did, you’ll probably have more negotiating power. But if the estimates are roughly equal, you may need to accept your insurer’s calculation.

If you have solid evidence that your car was worth more than your insurer claims, you could file a complaint with your state’s insurance department. Another option is to contact an attorney to discuss the possibility of arbitration or a lawsuit.

Read more: How to find cheap car insurance in 2024

FAQ

What is the actual cash value of a car?

The actual cash value of a vehicle is its fair market value. Your car's ACV is calculated as the replacement cost minus depreciation, which factors in things like the vehicle’s age, mileage, and wear and tear.

What happens when my car is totaled?

When your car is totaled, and another driver is at fault, their property damage liability coverage will be on the hook for reimbursing you. But if you were at fault, your insurance company will likely foot the bill if you have comprehensive and collision coverage. If the other driver was at fault but didn’t have car insurance, your uninsured/underinsured motorist coverage may cover the insurance claim.

The appropriate insurance company will calculate your vehicle’s actual cash value. The payout will go toward satisfying any outstanding loan balance on the car. You’ll get any money that’s left over.

What if I think my car is worth more than the insurance company says?

If you think your car was worth more than your insurer claims, you can try to negotiate with the company by submitting documentation about sales prices for comparable vehicles, as well as your car’s condition at the time of the crash. You may have the option to hire an independent appraiser. If you can’t reach an agreement, you could contact an attorney or your state’s insurance department.