Actual Cash Value
The actual cash value of property is a calculation done by insurance companies to determine the amount of money to pay for total damages or lost property. The actual cash value calculation is used when an item is damaged beyond repair and therefore has to be replaced; or where the property is lost or stolen.
The term actual cash value represents the cost of replacing the item of property at current prices minus an allowance made for depreciation. Depreciation is the decline in an item’s monetary value due to age, general wear and tear, or obsolescence. The term “fair market value” is used interchangeably—replacement cost less depreciation.
When property is insured at full replacement value, no depreciation is deducted when paying a claim. This type of insurance will carry a higher premium as it has to account for inflation. Actual cash value or market value is used for car insurance.
One should review the actual cash value of your car on a yearly basis and request your insurance company to adjust your premium accordingly; if not you will be paying too much for your car insurance. The Auto Trader’s Guide will give you the best indication of your car’s current cash value.