If your car is totaled or needs expensive repairs after an accident, your insurance company will pay out a claim to help you replace or fix your vehicle. But it isn't always clear how they determine the amount of money they'll give you.
One of the important factors involved in coming up with that figure is your car's value. And although that value makes a big difference when you're filing an insurance claim, most people don't know how insurance companies calculate it.
On its own, that wouldn't be such a big deal. But being in the dark about your insurer's valuation process means you might not have as much insurance coverage as you think you do. It's not uncommon for car owners to file an insurance claim and be sorely disappointed when they learn how little they'll be getting.
We want you to make the right decisions when it comes to your insurance, so we've put together a few things you should know about how your car is valued by your insurance company.
Your insurance agent might mention the cash value of your vehicle. That term sounds a little vague, but it has a very precise meaning in the world of insurance.
The cash value of your car is its perceived value, taking deprecation into account. In other words, it's an estimate of the current value of your car – not how much it cost when you first bought it but how much you could reasonably get if you tried selling it today.
So, even if your car is worth just as much to you as it did when you first drove it off the lot, it's worth a lot less to your insurance company.
When calculating your car's cash value, your insurer will consider its make and model, as well as wear and tear and mileage. They'll also compare this information to figures they keep in internal files about different types of cars.
Kelley Blue Book
If you want to know your car's cash value, look it up in the Kelley Blue Book. The Blue Book is a reliable resource that will generate estimates based on your car's information.
Replacement Value Coverage
Insurance companies will typically value cars according to their current cash value. But it is possible to get coverage for its replacement value.
Replacement value simply means that the insurer will cover the full cost of buying a new vehicle similar to the totaled one. For example, your 2010 Ford Mustang is worth $20,000 now but cost you $30,000 when you first purchased it. If you were insured only for actual cash value, you would be paid $20,000 after filing a claim. But with replacement value coverage, the insurance company will pay you enough for you to go buy a brand new model – $30,000 in this case.
This is an enticing option, especially if you drive like you’re in Intial D, but keep in mind that this extra coverage means extra premiums. If you need your insurance to be affordable in the short term so that you can better manage the monthly payments, this might not be the right option for you (see Experts Share Top Tips for Saving on Auto Insurance for advice on keeping your rate affordable).
Coverage and valuation for leased cars can be quite different than it is for owned vehicles. This is because some auto insurance policies only cover the lease value of the car. That means that if a car is leased for $1,500 per year for two years, the policy may only provide $3,000 of coverage.
This can be an issue if the car is of high value but the lease amount isn't. To make up for the difference, you can get gap insurance. This provides insurance for the difference between the lease value and the car's value. It also prevents the policyholder from being held responsible for any remaining losses if a claim is filed.
A lot of factors will go into deciding which auto insurance policy is most suitable for you. But making an informed decision requires knowing how much the insurance company will actually pay to replace or repair your vehicle.
Will you get enough to replace your vehicle? Or might you have to downgrade or settle for a used model? Knowing something about the valuation process will help you figure it out and allow you to make the right choice.