How Do Car Insurance Companies Determine Car Value?

If you're in an accident, the value of your car comes into play when deciding whether or not your car is totaled. Knowing your car's cash value versus the replacement cost is also important when choosing which type of insurance coverage you want.

Cash Value vs. Replacement Cost

Replacement cost is the amount you pay for your car at today’s cost. The cash value is the amount you pay for a similar car at today’s cost, or the replacement cost, minus depreciation. The cash value of your car is often far below its replacement cost, depending on the number of years your car has depreciated. If you total your car, it costs more to replace it than the actual cash value of your car at the time of the accident.

Choosing the replacement value option when you purchase car insurance addresses this problem. With a totaled car, you may be eligible for enough money for a new car as well as sales tax, title, and transfer fees. However, replacement value insurance costs significantly more than actual cash value coverage. The higher premium may be worth it when considering how much it would cost to replace your car.

How to Determine Actual Cash Value

To figure out your car’s actual cash value, factor in whether the car is new or used as well as the year, make, and model. Include the mileage, additional features, and condition of your car for the best approximation. By using your zip code, you may also find values and other information that are specific to your location. With this information and its own formula, the insurance company calculates your car’s actual cash value.

Blue Book Value

To find new and used cars’ depreciated value, insurance companies may refer to the Blue Book value. There are two Blue Books, one from the National Association of Automobile Dealers (NADA) and the other by Kelley Blue Book. On the Blue Book’s website, answer the questions needed to determine actual cash value to find the prices for new and used cars, including your car’s value.

Knowing your car’s cash value versus the replacement cost is also important when choosing which type of insurance coverage you want.

Is my car totaled?

The insurance company uses different factors to determine your car’s value before deciding whether your car is totaled. These vary between companies and states. The insurance company calculates the total loss ratio, or damage ratio, of the vehicle, which is whether the cost of repairs exceeds the actual cash value of the car.

Cars are usually totaled when repairs cost more, but this is not always the case. Sometimes the repairs cost less than the car’s value, but the insurance company still considers it totaled. This means the car exceeded the Total Loss Threshold, which the state often dictates.

If you’re unsure about whether to go with coverage for the actual cash value or replacement cost of your car, let us help you weigh your options and make the best decision for you. This way, you no longer have to wonder how much your car is worth.