How Car Insurance Companies Value Your Vehicle

June 19, 2013

Car insurance companies use several methods to determine the value of your car when you are in an accident. This information is what they use to decide how much they will reimburse you if your car is in an accident that results in the car being totaled. As you understand how each of these methods is used, review your current coverage and decide if you need to change your policy.

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Cash Value versus Replacement Value


Many auto insurance policies use cash value as the payout factor for repairs or replacement. Cash value is not the same as replacement value and it is important to understand the difference.

Cash value is based upon the actual value of the car at the time of the repair or replacement. In order to determine this amount, car insurance companies have databases of information on all of the various cars available on the road today. The database has information about the make and model of the car, original purchase price, average mileage and wear and tear. All of these factors determine the depreciated value of the car. This is what the actual cash value of the car is for the insurance company and what they will base any payouts on.

Depreciation is something that begins the moment you drive the car off the lot. Even if you were to decide to return the car the week following your purchase of the car, you would find that the car has depreciated in value simply because you bought it. Actual cash value insurance policy provisions take this into account.

Replacement value, on the other hand, is the actual cost to purchase another similar car. Often, this amount is based on what it would cost to purchase a brand new car. For example, if you drive a car that is 2 years old and get in an accident that totals the car, if you have replacement value coverage, then you would be reimbursed to go and purchase a new car.

Unfortunately, for many drivers, the actual cash value of the car is much less than what they owe on their car. If their car is totaled, the insurance company will pay off the cash value, but the car owner will be left with the balance between the cash value and the actual car loan to pay off on their own. Having car insurance that provides replacement value avoids this problem. However, replacement value coverage is also more expensive, so many car owners choose forego it.

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Gap Coverage

For individuals who are leasing a car, gap insurance coverage is also an option to make sure that they are fully covered for the entire value of the car. Very often, auto insurance for leased cars only covers the amount of the lease and not the total value of the car. If the car is totaled, however, the finance company will expect the person who leased the car to pay off the entire value of the car. Gap insurance provides coverage for this gap between the lease value and the purchase value of the car. Some lease finance companies require gap insurance as part of lease terms.

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