What is total loss car insurance? This is a question that many people have been asking, and luckily, we’ll be covering all you need to know. When it comes to car insurance, one of the most critical concepts to understand is “total loss.” This term is often thrown around in insurance discussions, but what does it mean? In this blog post, we’ll dive deep into the world of total loss car insurance, exploring what it is, how it works, and why car owners need to understand.
What is a Total Loss?
A vehicle is considered a total loss when the cost of repairs exceeds its actual cash value (ACV) or if the vehicle is damaged to such an extent that it is deemed unsafe or impractical to repair. This could happen due to severe accidents, natural disasters, or theft.
For example, if your car is involved in a collision and the repair costs are estimated at $15,000, but the car’s value is only $10,000, it will be classified as a total loss. In this scenario, the insurance company might decide it’s more cost-effective to declare the car a total loss and compensate you based on its pre-accident value rather than repairing it.
Types of Total Loss Car Insurance
Not all car insurance policies are created equal. The way total loss is handled can vary based on the type of insurance coverage you have. Here are the common types;
Actual Cash Value (ACV) Insurance
This is the most common type of car insurance policy when it comes to total loss claims. Here’s how it works. ACV insurance pays out the current market value of your car before the accident occurs. This value is calculated based on the car’s age, mileage, condition, and other factors. It’s often less expensive than other types of coverage. However, the payout might not cover the full amount you owe on a car loan or the cost of replacing your vehicle with a similar model.
Replacement Cost Insurance
This type of policy pays the amount it would cost to replace your vehicle with a new or similar model without factoring in depreciation. As a policyholder, you receive enough to buy a new car of the same make and model, which is particularly beneficial if you have a relatively new vehicle.
And on the downside, this coverage typically comes with a higher premium.
Guaranteed Asset Protection (GAP) Insurance
GAP insurance is designed to bridge the gap between what you owe on your car loan and the amount your insurer pays out in the event of a total loss. If you have a car loan, your car’s value might be less than what you owe. GAP insurance covers the difference.
This insurance type can save you from financial strain if your car’s value depreciates faster than your loan balance decreases. But it comes with an additional cost on top of your standard car insurance premium.
How Total Loss Car Insurance Works
When your car is deemed a total loss, the claims process typically unfolds as follows:
Assessment: After the incident, an adjuster from your insurance company will evaluate the damage and determine whether the vehicle is a total loss. This involves assessing repair costs and comparing them to the vehicle’s ACV.
Payout: If the car is declared a total loss, the insurer will offer a settlement based on the vehicle’s ACV. This amount is meant to reflect what your car was worth before the accident.
Settlement: Once you agree to the settlement, the insurance company will pay you (or your lender, if applicable). If you have GAP insurance, this policy will cover any remaining balance between the ACV settlement and your loan amount.
Salvage: The insurer may take possession of the total vehicle. It might be sold for salvage or parts, and the proceeds typically reduce the overall payout.
How is The Total Loss Value Calculated?
The calculation of the total loss value, particularly in the context of auto insurance, involves determining whether the cost to repair a damaged vehicle exceeds its actual cash value (ACV). If repairs are not economically feasible, the vehicle is considered a total loss. Here’s a detailed breakdown of how this calculation is typically performed:
Actual Cash Value (ACV)
The ACV is the vehicle’s market value immediately before the accident. Several factors influence the ACV:
- Specific make, model, and year of the vehicle.
- Mileage: Higher mileage typically reduces the ACV.
- Condition: The pre-accident condition of the vehicle, including wear and tear, previous damage, and overall maintenance.
- Prices of similar vehicles in the local market.
Repair Costs
The cost to repair the vehicle is estimated by an appraiser who assesses the damage and calculates the cost of parts and labour required to bring the vehicle back to its pre-accident condition.
Total Loss Threshold
Insurance companies use a Total Loss Threshold (TLT) to determine if a vehicle is a total loss. The TLT can be expressed as a percentage of the ACV. If repair costs exceed this threshold, the vehicle is declared a total loss.
Threshold Percentage: This percentage varies by insurer and state regulations. For example, if the TLT is 70%, and the ACV of a vehicle is $10,000, the vehicle would be considered a total loss if repair costs exceed $7,000.
Salvage Value
Salvage value is the amount the insurer expects to recover by selling the damaged vehicle to a salvage yard or at auction. This value is subtracted from the ACV when calculating the total loss payout.
Factors Affecting Total Loss Decisions
Several factors can influence whether a car is declared a total loss. Some of these factors are;
- Cost of Repairs: If the repair costs exceed a certain percentage of the car’s value (usually 70% to 80%), it’s more likely to be considered a total loss.
- Market Value: The vehicle’s pre-accident market value plays a crucial role in determining if it’s worth repairing.
- Insurance Policy: Your specific insurance coverage, including limits and exclusions, will affect the total loss process.
Can you keep a car that’s a total loss?
Yes, you can, but there are specific steps and considerations to be aware of. Here’s a detailed explanation of how this process works;
Steps to Keep a Total Loss Car
If you wish to keep a total loss car, here is how to go about it;
Inform the Insurance Company
When your insurance company declares your car a total loss, let them know you want to keep the vehicle.
Determine the Salvage Value
The insurance company will calculate the salvage value of the vehicle. This is the amount they could have recovered by selling the car to a salvage yard.
Adjust the Settlement Amount
The insurance company will deduct the salvage value from the total loss settlement amount. For example, if the car’s actual cash value (ACV) is $10,000 and the salvage value is $1,500, the settlement amount would be $8,500 ($10,000 – $1,500).
Transfer of Ownership
You will typically need to complete some paperwork to transfer ownership of the totalled car to you, which might include a salvage title.
Obtain a Salvage Title
Depending on your state’s regulations, you may need to obtain a salvage title. This title indicates that the car has been declared a total loss. The specific process for obtaining a salvage title varies by state.
Repair and Inspection
If you plan to repair the car and put it back on the road, you will need to bring it up to a safe and roadworthy condition. In many states, the vehicle must pass a safety inspection before you can register it and receive a rebuilt or reconstructed title.
Insurance Coverage
After repairs, you can obtain insurance for the car, but it might be limited to liability coverage. Comprehensive and collision coverage can be difficult to obtain or more expensive for a car with a salvage or rebuilt title.
Read Also: How To Buy Car Insurance For Your New Car
Considerations When Keeping a Total Loss Car
You need to consider the following if you want to keep a total-loss vehicle;
Cost of Repairs
Evaluate whether the cost to repair the car is worth it. Repairs on a total vehicle can be extensive and costly, sometimes exceeding the settlement amount minus the salvage value.
Future Insurance
Insuring a car with a salvage or rebuilt title can be challenging. Not all insurance companies offer comprehensive or collision coverage for such vehicles, and premiums can be higher.
Resale Value
A car with a salvage or rebuilt title has a significantly lower resale value. If you plan to sell the car in the future, be aware that it will not fetch the same price as a similar car with a clean title.
Safety and Reliability
Ensure that the car is thoroughly repaired and inspected for safety. A vehicle that has been severely damaged may have underlying issues that could affect its reliability and safety.
The Impact of Total Loss on Your Insurance
Experiencing a total loss can have several implications for your insurance coverage and future premiums, including;
Premium Increases
Following a total loss claim, your insurance premiums might increase. Insurers consider claims history when calculating rates, and a total loss could signal higher risk.
Claims History
A total loss claim will be recorded on your insurance history, which could affect your ability to obtain coverage in the future or lead to higher premiums.
Future Coverage Options
If you repeatedly have total loss claims or if your driving history shows multiple accidents, you might face challenges obtaining insurance or higher costs.
Tips for Managing a Total Loss Situation
Dealing with a total loss can be stressful, but there are steps you can take to manage the situation effectively:
- First, you need to understand what your policy covers, including total loss scenarios, to avoid surprises.
- If you’re financing or leasing your vehicle, GAP insurance can be a wise investment to cover any potential shortfall.
- Keep records of your car’s condition and any improvements made. This can help in negotiations with your insurer.
- If you believe the insurer’s valuation of your car is too low, you can negotiate. Provide evidence, such as recent repairs or upgrades, to support your case.
- If disputes arise or if you feel the settlement offer is unfair, consulting with a legal professional specialising in insurance claims can be beneficial.
Conclusion
There is all you need to familiarise yourself with what total car insurance means, types of coverage available, the claims process, and how to manage the aftermath of a total loss. Remember, having the right coverage in place can offer peace of mind and financial security in the event of an unexpected loss.
