How is Total Loss Value Calculated?
If you’re in a bad auto accident that causes extensive damage to your car, your insurance company may decide to declare the vehicle a total loss -- in other words, that your car is “totaled.” This means that the insurance company has decided it’s not worth the cost to repair it. But what does “not worth it” mean, and what factors are taken into consideration?
Calculating the total loss value of a car is not exactly easy, and may vary considerably by state and insurance company. It is important to know how your vehicle's value is calculated because it can help you negotiate for a better payout on your claim. It can also provide info as to why you might not be getting enough money to pay off your loan.
Actual Cash Value
Most traditional car insurance policies cover vehicles using actual cash value, deciding it’s not worth repairing your vehicle if the repairs will cost more than a certain percentage of the damaged car’s value, generally in the neighborhood of 80%. Exceptions include agreed value policies (usually for classic cars), stated value policies, and additional coverage such as gap insurance or new car replacement. Actual cash value is another way of saying what the vehicle is worth at the time of loss.
If you could sell your vehicle minutes before your accident, how much money could you get for it? It is kind of hard to put an exact number on it without some help.
What are the Factors Used?
- Physical Wear and Tear
Insurance companies use their own proprietary software to calculate actual cash value of vehicles. Obviously, you can't use their software. You can check out Kelly Blue Book, Edmunds, or Auto Trader as a reference, but don't get your heart set on its estimate. It is just a ballpark figure. Pretty sure any claims adjuster will tell you, they do not pay out claims based on Kelly Blue Book.
Checking the local classified ads is also part of the process. Vehicles for sale which are of like, kind, and quality can be used as a base.
Any recent repair receipts you provide are also used to calculate your replacement cost. A new engine, new transmission, new tires, all can make a difference in the size of your check.
Unfortunately, it is not uncommon to receive a total loss payout check lower than your car loan amount. Shortfalls happen for several different reasons.
- The car depreciating faster than the rate you are paying down your loan.
- Extended car loans with rates.
- Wrapping a prior auto loan into your current loan.
- Wrapping other extras such as extended warranties, taxes, and title fees into your loan.
- Little to no down payment auto loans.
Avoiding Short Falls
Both gap insurance and new car replacement can help you avoid the first shortfall. They will both combat the depreciation problem. The trouble is, nothing really helps you when it comes to other items you have wrapped into your loan. Paying 20% down at the time of your car purchase along with paying all warranties, taxes, and title fees the only way to not be underwater at the time of purchasing a vehicle. That is unless you were able to get a steeply discounted price other people do not have the same privilege to receive.