What is ACV (ACTUAL CASH VALUE OF THE VEHICLE) in Auto Insurance?

23.04.2021
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Introduction

Whether you have a car, a motorcycle, or an RV(Recreational vehicle), all these modes of transportation need Auto Insurance most of the time almost in all states. In order to protect your vehicle with an insurance policy, it is required to know what the term actual cash value (ACV) means.

Actual cash value (ACV) plays a significant role in the Insurance Industry. Actual cash value is used by all insurance companies to assure policyholders receive reasonable compensation for damaged or destroyed property.

But how do insurance companies decide on the value of your vehicle? The answer is that most insurance carriers use industry formulas to calculate ACV of a car, so it can be difficult to predict how car insurance providers determine a vehicle’s pre-collision value. In this blog, we will discuss a little more about the actual cash value of a vehicle in auto insurance?

What Does Actual Cash Value Mean?

The ACV or actual cash value of a car is the amount that is provided by the car insurance company after it is stolen or totaled in an accident. A car’s ACV is its pre-collision value as determined by the car insurance company, minus whatever deductible the insured is required to pay for the comprehensive or collision coverage.

The term ACV is likely to be seen when a car insurance claim is made. If your car is physically damaged and considered a total loss, and your car insurance company pays for the claim, the payment you get is likely based on the actual cash value(ACV) of your car instead of its replacement value.

An insurer takes into account usage, past accidents, and general wear and tear to a vehicle, therefore, ACV of a car comes up with maybe hundreds, or even thousands of dollars less than an individual paid for his/her car. Even if a person is a meticulous owner who has taken great care of his/her vehicle, cars depreciate in value the moment you drive them off the lot. So that depreciation will be taken into consideration too.

Calculating Actual Cash Value

Actual cash value is determined by taking the replacement value of an automobile and deducting depreciation, or the wear and tear costs that accumulate after the purchase of the vehicle.

ACV = Replacement cost – depreciation
Here Replacement cost is the original value of the brand new vehicle(when it was first bought).

If a car is wrecked, the insurance company figures out whether it is a total loss by comparing its value to the expected cost of repairs. If the expense to return the car to its pre-loss condition exceeds the value of the car, the insurance company considers it a total loss. However, in some states, the threshold for a total loss occurs at a certain percentage. For example, in Alabama, if the cost to repair the car is 75% of its value, then it is a total loss.

An insurance carrier looks at the following factors to calculate the actual value of a totaled car:

  1. Pre-loss condition
  2. Mileage
  3. Options
  4. Age

Most of the insurers also consider the car’s “salvage value,” which is the price of its parts and metal that could fetch on resale.

And if a car is just a few months old and barely has any mileage when it is totaled, the ACV is still likely to be much lower than what an individual has paid, since it is no longer brand new.

Can the insured avoid depreciation?

As an insured, you must be familiar with the concept of actual cash value. But even after understanding the term ACV, if your car is totaled in an accident, you probably would not like having depreciation deducted from the claim payment.

To avoid the problems that depreciation can cause, some insurance companies provide a replacement cost coverage endorsement to the policy. The endorsement allows certain auto claims to be paid without deducting depreciation. But, adding the replacement cost coverage plan to the auto insurance policy, the premiums become much higher than that of the ACV coverage policy of the vehicle.

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