Actual Cash Value: What If the Loan Is Higher?

For many car owners, if a car is totaled they may discover that the actual cash value payment of their car insurance is far less than the amount of their car loan. While this can be distressing, being prepared for this possibility can prevent unnecessary alarm and upset.

What Is Actual Cash Value?

When you purchase a car, the moment you drive the car off the lot it depreciates in value. Even if you were to decide to turn around the sell the car for some reason the next week, the car is still lower in value than the purchase price. This is part of what is taken into account when insurance companies calculate actual cash value.

Other factors include the age of the car at the time you make a claim, the amount of miles driven on the car and average wear and tear to the car. In addition, if there is unusual damage to the car this also may be taken into account. The older a car is, the lower the amount of the actual cash value. Actual cash value will always be lower than the amount of your car loan, especially if you purchased the car brand new and have financed it for several years.

All of this information is taken into consideration in actuarial databases that compile information on which an insurance company bases what it offers as the actual cash value at any point in time during the life of the car when you make a claim.

Actual Cash Value vs. Replacement Value

As you can see, the actual cash value is usually nowhere near what it costs to replace a car. If you have a major accident and the car is totaled, the cost to turn around and purchase a new car will always be higher than what your old car was worth at the time of the accident.
Replacement value is an option for car insurance that addresses this problem. Instead of choosing the actual cash value option, choose coverage that provides for replacement value. In many cases, not only is payment provided to purchase a new car, but additional expenses like sales tax, title and transfer fees may also be included, although you may have to ask for these expenses to be included or covered. Replacement value car insurance is certainly much more expensive than accepting actual cash value coverage. However, for many people, the added premium is well worth it when they consider the expense of replacing their vehicle.

Shifting from Replacement Value to Actual Cash Value

Another approach is to reevaluate coverage levels every year of the life of the car. During the first few years after a car is purchased is when depreciation is usually at the highest and when replacing the car will be at the highest cost. For this period of the life of the car, purchase replacement value coverage. After several years and after depreciation has leveled off (you can determine this by researching sources like Kelly Blue Book and Edmonds), then begin shifting your car insurance to less expensive actual cash value coverage and saving your money toward a new car.