What’s the Difference Between Replacement Cost and Actual Cash Value for Cars?

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Quick Answer

The actual cash value (ACV) of your car is how much money you could get for it if you sold it. The replacement cost value (RCV) is how much it would cost to buy a comparable new car of the same make and model. Standard auto insurance typically pays out the actual cash value if your car is totaled, but that may not be enough to replace the car.

Mature man making a phone call after a car accident.

If your car is totaled in an accident or stolen, standard collision or comprehensive insurance generally reimburses you for the actual cash value of the car, not the replacement cost value. The actual cash value (ACV) is how much the car could have sold for before being totaled.

However, the ACV might not be enough to replace your totaled vehicle with a similar new model, or to pay off your auto loan or lease. That could leave you paying thousands of dollars out of pocket. To help protect yourself against this risk, you can buy new car replacement insurance or gap insurance.

Actual Cash Value vs. Replacement Cost Value
Actual Cash Value (ACV)Replacement Cost Value (RCV)
What standard car insurance pays if your car is totaledWhat new car replacement insurance pays if your car is totaled
Value of the vehicle before being totaledAmount needed to buy a comparable new vehicle
Lower insurance premiumsHigher insurance premiums

What Is Actual Cash Value?

Actual cash value typically reflects what the car could reasonably fetch in a private sale on the open market. Even if your totaled car was nearly brand new, however, the ACV payout may not be enough to replace it with a similar model. That's because new cars can depreciate by up to 20% in the first year of ownership alone.

If you purchased a new car for $40,000 and it's totaled a year later, for example, its actual cash value might have dropped to $32,000 (80% of $40,000). That probably wouldn't be enough to buy a brand-new version of the same make and model vehicle.

Insurance companies use their own methods to determine your vehicle's ACV (more on that below). If you're curious what your car's actual cash value might be, you can visit websites such as Kelley Blue Book, Edmunds or J.D. Power to get an estimate called a book value. This usually requires providing information about your car's make, model, trim, year, mileage and condition.

Learn more: What Is Depreciation on a Car and Why Does It Matter?

How Is My Car's Actual Cash Value Determined?

Insurance companies use their own methods to determine actual cash value. The most basic method is to use the car's replacement cost value and subtract depreciation. For a more accurate ACV determination, insurance carriers typically also consider the following factors about your vehicle:

  • Make and model
  • Age
  • Condition
  • Mileage
  • The possibility of unknown damage, such as leaks or alignment issues
  • Resale or salvage value of the vehicle's parts and metal
  • Demand for the vehicle in the local market and recent sale prices for comparable vehicles

Your insurance company may also use a third-party appraiser to fine-tune the vehicle's actual cash value.

Suppose you buy a new car for $30,000 and it's totaled in an accident two years later. An estimate based on replacement cost value minus depreciation might put the car's actual cash value at $24,000. However, unusually high mileage, cosmetic damage or a history of accidents and repairs could reduce the vehicle's ACV. Conversely, the same car kept in pristine condition with low mileage and no mechanical breakdowns or accidents may have a higher ACV.

Learn more: What Happens if Your Car Is Totaled?

What Is Replacement Cost Value?

Replacement cost value insurance, also called new car replacement insurance, pays to replace your vehicle with a new one of the same make and model if your car is totaled in a covered loss. This added coverage comes at a cost, however: The premium for a new car replacement policy can be about 5% more than a policy that offers actual cash value reimbursement, according to insurance comparison site The Zebra.

Not every insurance company offers new car replacement insurance, and coverage availability can vary by state.

Although requirements can differ depending on the insurance company, you typically need to meet the following criteria to buy new car replacement insurance.

  • Your car must be within the mileage and age limits set by the insurer.
  • You must be the original owner of the car.
  • You must carry comprehensive and collision coverage for the vehicle.

Allstate, ERIE, Farmers, Liberty Mutual, Travelers and USAA are among the auto insurance companies that offer new car replacement insurance. The terms of coverage can vary depending on the insurer. For example, USAA's car replacement assistance coverage, available for vehicles of any age, pays you 20% more than your car's actual cash value if it's totaled in a covered loss. Travelers' Premier New Car Replacement pays to replace your car with a new one of the same make and model if your vehicle is totaled in the first five years of ownership.

You're still responsible for paying your deductible when you file a new car replacement coverage claim.

Learn more: What Are the Types of Car Insurance?

Consider Gap Insurance for Extra Protection

If your car is totaled in an accident or stolen, you're responsible for paying off any outstanding balance on your auto loan or lease. Due to depreciation, however, you might owe more on your loan or lease than the vehicle is worth when your car is relatively new. This can also happen if you've rolled over negative equity on a previous car into a new auto loan. Guaranteed asset protection insurance, or gap insurance, can help. Gap insurance bridges the gap between the actual cash value payout you receive and the amount you owe your lender.

Example: Suppose you bought a car for $30,000 last year that's now worth $24,000. When the car is totaled, the insurance pays out $24,000 (minus your deductible), not the full $27,000 you still owe on your auto loan. Without gap insurance, you'd have to come up with $3,000 out of pocket to pay off the loan. Gap insurance covers the $3,000 so you can repay your auto loan without draining your emergency fund or resorting to other means, such as taking out a loan.

Some lenders or leasing companies require you to get gap insurance. Even if yours doesn't, purchasing gap insurance may be a good idea if:

  • Your down payment on your car was less than 20%
  • Your loan lasts five years or more
  • You purchased a car that depreciates rapidly
  • You're in the first year or two of making loan payments
  • You couldn't afford to cover the gap yourself

You must have comprehensive and collision insurance to purchase gap insurance. On average, purchasing gap insurance from a major auto insurance carrier typically costs about $7.50 per month or $90 annually, according to Insure.com. Once your auto loan is paid off or your car is worth more than your loan balance, you can cancel gap insurance.

Learn more: Can You Get Gap Insurance at Any Time?

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The Bottom Line

Purchasing replacement cost value insurance can add a bit to your auto insurance premiums. However, depending on your financial situation, the extra expense may be worth it for the peace of mind it can bring.

If you're looking for ways to get the car insurance coverage you need for less, try using Experian's auto insurance comparison tool. Simply provide your information once and get quotes from more than 30 top auto insurance companies all in one place. It's a convenient way to compare insurance quotes and possibly find a lower rate for car insurance.

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About the author

Karen Axelton specializes in writing about business and entrepreneurship. She has created content for companies including American Express, Bank of America, MetLife, Amazon, Cox Media, Intel, Intuit, Microsoft and Xerox.

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