This is a type of insurance policy that pays damages equal to the replacement value of the damaged property, minus depreciation.

Actual cash value is one of two major types of policies you choose from when buying a homeowners or renters insurance policy.

When you go with actual cash value and suffer a loss, the insurance company will pay you the actual cash value of the item in today’s market.

For example, if the TV you own is five years old, the insurance company will pay you for whatever that TV would sell for at the time it was damaged or stolen – not necessarily what you paid for it five years ago.

The insurance company determines the depreciation based on a combination of objective criteria including the category and age of the property and sometimes a subjective assessment (the insurance adjuster’s visual observation of the property.)

If the property is stolen and there is no visual record of it, the insurance company would take off an amount for all the wear and tear it endured prior to the time it was stolen.

Insurance companies consider actual cash value the standard when reimbursing policy holders – because generally they will have less to pay out in a claim under this option.

As a result, an actual cash value policy will generally be less expensive than a replacement cost policy, which pays you the amount of money it will take to replace the item regardless of depreciation.