What is actual cash value and how does it work?

If your car is totaled after an accident, your insurance company probably won't pay what you originally paid for the vehicle. Instead, the company usually pays your car’s actual cash value (ACV). This is what the car was worth immediately before the loss occurred.

Keep in mind that the term “actual cash value” is used throughout multiple types of insurance, including home and renters insurance. However, for auto insurance, ACV refers specifically to your car.

Here's how ACV works in car insurance, how insurance companies calculate it, and what it means for your insurance if your vehicle is totaled.

How actual cash value works

ACV is what your car was worth immediately before an accident. In other words, it’s the market value of your vehicle.

In most cases, ACV applies when your vehicle is declared a total loss. Rather than paying to repair your vehicle, the insurance company pays you the car's ACV (minus your deductible) and takes ownership of the damaged vehicle.

How actual cash value is calculated

Insurance companies tend to look at these factors when determining your vehicle’s actual cash value. However, how each factor is weighed can vary, depending on the company.

Vehicle age and deprecation

Vehicles naturally depreciate over time. This depreciation can affect your insurance payout and ACV. In fact, it’s estimated that a car loses 30% of its value in its first two years and up to 12% of its value in each subsequent year.

For example, a vehicle purchased for $35,000 could be worth around $24,500 after two years. After another year of depreciation, its value could drop to $21,560.

Mileage

Mileage will also factor into your vehicle’s actual cash value. For example, two identical 2020 Honda Accords might have very different values if one has 40,000 miles and the other has 140,000 miles.

If your vehicle has higher mileage, it could signal more wear and tear, which can reduce its market value.

Vehicle condition

Although routine maintenance won't stop depreciation, it can help preserve your vehicle's ACV and prevent it from being worth less than comparable vehicles. For example, insurers might look at factors like:

• Interior and exterior condition
• Maintenance history
• Tire condition
• Existing mechanical issues
• Prior cosmetic damage

If you keep your vehicle clean, well-maintained, and free of major issues, it might receive a higher valuation than a similar vehicle with worn tires, body damage, or unresolved mechanical problems.

Local market value

Insurance companies will often look at comparable vehicles that recently sold or are currently listed for sale in your area when determining your ACV. For example, a pickup truck might be worth more in one region of the country than another simply because local demand is higher.

Previous damage and repairs

Your vehicle's history is another major factor when calculating its ACV. If your car had prior accident damage, significant bodywork, or other issues before the loss occurred, that could reduce its ACV.

Actual cash value example: A totaled car claim

Let's say you own a 2020 Honda Accord that you purchased a few years ago for $28,000. One day, you're involved in an accident. After inspecting the damage, the insurance company determines it would cost $18,000 to repair the vehicle.

At this point, the insurer would compare the repair cost to the vehicle's ACV. After reviewing factors like mileage, condition, local market prices, and the vehicle's history, the insurance company determines your Accord's ACV is $16,000.

Because the repair cost exceeds the vehicle's value, the insurer might declare the car a total loss. Instead of paying to repair the vehicle, the insurance company would offer you a settlement based on the car's ACV.

Here's what that might look like:

• ACV: $16,000
• Collision deductible: $1,000
• Insurance payout: $15,000

In this scenario, you'd receive $15,000 because your deductible is subtracted from the settlement amount. If you had replacement cost coverage for your vehicle (an optional add-on that’s less common), your insurance company could pay what it would cost to replace the vehicle today.

Keep reading: How to lower your car insurance costs

What happens if your car is worth less than your loan balance?

If your car is financed with a loan and your ACV is less than your current loan balance, you’re considered to be “upside down” or “underwater” on your auto loan.

For example, say:

• You still owe $22,000 on your auto loan
• Your vehicle's ACV is $18,000
• Your deductible is $1,000

If the car is totaled, your insurance company might pay $17,000 ($18,000 ACV minus your $1,000 deductible). But you’d still owe the lender $22,000. That leaves a $5,000 gap that you'll generally be responsible for paying out of pocket.

Being “upside down” is most common during the first few years of a loan because your vehicle can depreciate faster than your balance goes down. This is why your lender might encourage you to get gap insurance, which helps cover the difference between your vehicle's ACV and what you still owe on your loan.

Can you dispute an actual cash value estimate?

You might be able to challenge your ACV estimate and negotiate a higher settlement if you believe your insurance company wrongfully undervalued your vehicle.

The first step is to review the valuation report carefully. Look for mistakes involving:

• Vehicle trim level
• Mileage
• Optional features
• Recent upgrades
• Vehicle condition
• Accident history

For example, if your vehicle has leather seats, a premium sound system, or a higher trim package that wasn't included in the valuation, the estimate could be lower than it should be.

You can also gather evidence to support your case, such as:

• An appraisal from a third-party appraiser, who you’d hire to get an estimate
• Listings for similar vehicles in your area
• Maintenance records
• Receipts for recent repairs
• Documentation of upgrades or aftermarket additions

What determines how much you'll receive after a total loss?

These factors usually determine the amount you ultimately receive after your vehicle is declared a total loss:

• Actual cash value: This is the jumping off point for how much you’ll ultimately receive. The higher your vehicle's ACV, the larger your potential settlement could be.
• Your deductible: If you're filing a collision or comprehensive claim, your deductible will generally be subtracted from your payout. For example, if your vehicle's ACV is $20,000 and you have a $1,000 deductible, your settlement could be $19,000.
• Vehicle condition: Keeping your vehicle in good condition will always give it the best chance of receiving a higher ACV valuation.
• Local market prices: Supply and demand can also impact the ACV your vehicle receives. If you have a popular vehicle that’s short on supply, it can increase your chances of a better payout.
• State laws: Some states use a total loss formula to determine if your vehicle can be repaired. Others use a percentage — if your repair costs exceed 70% to 100% of its value, it could be considered a total loss, depending on the state. How your insurance company is required to handle repairs vs. total losses could largely hinge on the state you live in.
• Loan or lease balance: Your loan balance doesn't directly affect your vehicle's ACV. But it does affect how much money lands in your pocket. If you owe more than the vehicle is worth, some or all of your settlement could go toward paying off the loan.

Find out: Do you need insurance for a leased car?

How to get the best payout for actual cash value

You can't stop your vehicle from depreciating. However, here are some steps you can take to help ensure you're receiving a fair settlement.

• Document your vehicle's condition. Set up a reminder to take photos of your vehicle twice a year. This way, if you’re in an accident, you’ll have recent documentation of its interior and exterior to help support your case.
• Save maintenance records. These records might not increase the value of your vehicle. But they can help prove that you kept your vehicle as close to factory condition as you could.
• Review the insurer's valuation carefully. If your vehicle is declared a total loss, review the report to make sure your car’s details were accurately reported. A dispute could be worth it if you believe errors were made.
• Gather comparable vehicles. If you think the valuation is too low, look for similar vehicles for sale in your area. These listings could help support your argument during negotiations.
• Don’t be afraid to ask questions. Insurance adjusters handle claims every day, and they're generally willing to explain how the valuation was determined if you need clarification.

What to know before filing a claim

If you’re about to file an auto insurance claim — and there’s a chance you could be preparing for a total loss settlement — here are a few things worth reviewing ahead of time.

Know what coverage you have

ACV usually comes into play when you're using collision or comprehensive coverage. If you carry only liability insurance, damage to your own vehicle typically won't be covered after an accident you cause.

Learn: Liability vs. full coverage auto insurance

Understand your deductible

Many drivers focus on the potential payout and forget about their deductible. Remember: If your vehicle is declared a total loss, your deductible will generally be subtracted from the settlement amount.

Review your vehicle's value periodically

Drivers often don't think about their vehicle's value until it's totaled. Checking resources like Kelley Blue Book, the National Automobile Dealers Association (NADA), or other valuation tools periodically can help you understand roughly what your car is worth and whether you're at risk of owing more than it's worth.

Consider gap insurance if you're financing or leasing

If you're carrying a loan or lease with a balance that’s higher than your vehicle’s potential value, you could need gap insurance. This will help prevent you from being responsible for the difference if your vehicle is totaled while you’re underwater on your loan or lease.