How Car Insurance Companies Value Your Vehicle

June 8, 2016

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 it being totaled. As you understand how insurance companies use these, review your current coverage and decide if you need to make changes to 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 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 total a car that is two years old and you have replacement-value coverage, then you would be reimbursed to go and purchase an equivalent new car.

Unfortunately, for many drivers, the actual cash value of the car is much less than what they owe on the bank. If their car is totaled, the insurance company will pay off the cash value, but the vehicle's owner will be left with the balance that remains between the cash value and the actual amount needed to pay off their loan. Having car insurance that provides replacement value avoids this problem. However, replacement value coverage is more expensive, so many car owners choose to 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 the difference between the lease value and the purchase value of the car. Some lease finance companies require gap insurance as part of lease terms.