If your car gets totaled, your auto insurance will step up to pay for the damages. But how much will it cover? Your insurer will pay you for the actual cash value (ACV) of your vehicle. This means that you’ll receive a check for what it’s worth right before the accident. Providers are only willing to replace your car with a similar vehicle of approximately the same purchase price.
In this article, you’ll learn what actual cash value is and how it works. This includes how your auto insurance company calculates the value of your car. We’ll also break down what you can do to avoid paying out the rest of your loan.
What Is Actual Cash Value?
When your car is a total loss, your insurance company will pay you for its actual cash value (ACV). The ACV is its replacement cost, minus deprecation. In more basic terms, it’s how much the vehicle is worth right before the accident, not when you first bought it.
Your car depreciates as soon as you drive it off the dealer’s lot. Each year, its value can go down by as much as 20%. Depreciation can occur because of the following:
- Mileage and overall use. The more miles you put on your car, the less valuable it’ll be.
- Condition. If you use your vehicle in harsh conditions, work, or if it’s been in an accident, its value will go down.
- Age. As a vehicle gets older, its value will go down.
- Make and model. Certain makes and models keep their value more than others.
After an accident, an insurance claims adjuster will assess the damages and weigh that against your vehicle’s value. They’ll label it as a total loss if the damages cost more than the actual cash value. Then, you’ll receive a cash payout equal to the ACV. That way, you should be able to get another vehicle of the same year, make, and model.
What Is Replacement Cost?
Most normal insurance policies only cover the ACV of your vehicle. But, in some cases, you can also get a replacement cost or stated amount policy. This means that your insurer will pay you for the amount it costs to replace your car or buy a newer one. Replacement cost is more common in homeowners and renters policies.
How Insurers Determine Actual Cash Value
After you’re in an accident, your insurance company must figure out how much your vehicle is worth. The ACV is generally your car’s value minus depreciation over time. However, keep in mind that insurers calculate the actual cash value uniquely. As we mentioned earlier, providers use details like your vehicle’s age and mileage to determine depreciation. Here’s a full list of factors that your carrier may use to determine the ACV:
- Age
- Mileage
- Changes or modifications
- Use
- Accident history
- Resale value
After your insurance provider determines actual cash value, you’ll get a payout. As an example, consider that you bought a car that was worth $40,000 when you drove it off the lot. If your insurer believes that depreciation was $10,000 after four years, $30,000 would be the ACV. Then, you’d receive a cash payout for the same amount.
Each vehicle’s current value can vary wildly. Guides like Kelley Blue Book (KBB) and the National Automobile Dealers Association (NADA) can help you know your vehicle’s current value. Your insurer will also have this information. However, it’s a smart idea to know it for yourself in case you need to dispute the value.
It’s best to prepare yourself for the reality of your car’s value. It may be up to hundreds or even thousands of dollars less than you thought. But it could also surprise you and be worth more. This is another reason why you should look at the KBB or NADA value beforehand.
How to Dispute the Value of Your Vehicle
In some cases, you might feel that your insurance company has undervalued your car. You have every right to dispute the value with them. It’s a good idea to do so. It’s in the insurer’s best interest to pay you the lowest amount it can. However, you need to be able to prove your vehicle’s value is more than what your provider claims it to be. You can do this with the following steps:
Speak With the Appraiser
It’s a good idea to speak with the insurance company’s appraiser or adjuster. This will help you gain an understanding of why your car is valued at that amount. This is also the time to communicate important facts about your vehicle to them. Be sure to mention any features, upgrades, or modifications that they may have missed.
Find Out What Similar Cars Cost near You
This is an important step in the dispute process. Take the time to research the local market and find out what other vehicles are going for. Be sure to take a look at cars that are similar to yours in terms of:
- Make and model
- Age
- Miles
- Condition
- Used or new
Get Your Own Appraisal
It’s also a good idea to think about getting your own appraisal. This is a way for you to have another unbiased opinion to support your claim. Of course, this option will cost you extra money. But it may be the difference between your insurer denying your claim and accepting it. Just be sure to pick a trustworthy party to appraise your car; otherwise, it may appear biased.
What to Do If You Have a Loan
If you’re financing your vehicle, the loan doesn’t go away after it becomes a total loss. You’re still on the hook to pay the rest of it. Unfortunately, your insurer’s actual cash value payout may not be enough to cover the rest of the loan.
Luckily, your insurer will cover the rest of your loan if you carry guaranteed asset protection (Gap) coverage. Gap covers the difference between your car’s ACV and the loan’s remainder. Lenders will generally want you to have gap insurance on your policy. But if you don’t, you’d have to pay for the loan out of pocket.
Frequently Asked Questions
How is actual cash value calculated?
ACV is your automobile’s replacement cost minus its depreciation over time. In more basic terms, it’s how much it costs to replace, minus how much it’s worth now. Your insurer uses factors like age, mileage, condition, and accident history to estimate depreciation. With most insurance policies, you’d receive the ACV as a cash payout if your car gets totaled.
Is the trade-in value the same as the actual cash value?
Not exactly. While both refer to a car’s value, the meaning is a bit different. A car’s trade-in or fair market value is how much you could reasonably sell it for. On the other hand, your vehicle’s ACV is how much your insurer will pay you for it if it becomes a total loss. So, fair market value is a term used for transactional purposes, whereas ACV is more for the insurance world.
Which is better? Replacement cost or actual cash value?
Replacement cost and actual cash value both refer to how much you’re compensated after an accident. But they aren’t quite the same. With replacement cost, you’ll receive a full payout equal to how much it’d cost to buy a new car of the same model. Meanwhile, ACV only pays you for how much the vehicle is worth right now. Most auto insurance policies cover the ACV, not the replacement cost.
Replacement cost is better if you can afford or find it, but ACV is cheaper and more common. There are advantages to both. It just depends on what fits your situation.
What if I disagree with my insurance company’s valuation?
You don’t have to accept your insurance company’s valuation. If you disagree with the appraisal, you can always dispute it. It’s not that simple, though. To win the dispute, you’ll need to prove that your car is worth more than what the insurer’s adjuster originally thought. But how do you do that? By following these steps, you’ll be on the right track:
- Get ahold of the insurer’s adjuster. By speaking with your provider’s adjuster, you can find out why your car is being undervalued. You can also tell them about anything they may have missed that could raise its value, like special features or modifications.
- Research the market. Have a good idea of what similar vehicles are selling for near you. Pay close attention to cars of a similar make and model, age, and condition.
- Conduct your own appraisal. You may need to resort to having your own appraisal done. In this case, you’d have a fair and unbiased opinion backing you up when you dispute your insurer.
It’s also a good idea to keep up with your vehicle’s KBB or NADA value. If you do this, it could help you know if your provider is lowballing you. Also, be aware that it’s in the insurer’s best interest to pay as little as possible. This is why it’s smart to do your due diligence.
