Car Totaled? Here's What to Expect From Your Car Insurance

When you hear the phrase "It's totaled," your car accident nightmare has come true. The adjuster makes that assessment when the cost of fixing your vehicle is too high for its value. Does that mean you get a new car as a replacement? Not at all. Your current auto insurance will dictate the settlement amount.

More and more cars are judged to be a total loss each year, often because replacement parts are so high. Just replacing a headlamp assembly can cost over $2,000. A little fender bender can easily reach $7,000 or more. Often to the driver's surprise, a relatively minor accident can leave your car as a total loss. 

When the insurance adjuster totals your car, you can end up on the hook for thousands of dollars left on your loan or lease agreement. You may not receive enough funds to replace your car with a similar model. You may have trouble meeting your most basic transportation needs. To prevent these problems, check out your policy terms now before you put your coverage to the test. And if you are under-insured, supplement your coverage.

What is the Role of a Claims Adjuster?

When you are in a motor vehicle accident, your insurance company (or the other driver's company) will usually send a claims adjuster to assess the damage and determine what type of settlement you will receive. The adjuster will determine if your car is a total loss based on the damages it sustained and your vehicle's fair market value on the day it was totaled. Usually, the fair market value is determined by industry standards. Claims adjusters are a key part of the insurance payout process, and their decisions can affect your finances for years.

The adjuster will inspect your vehicle's damage, interview witnesses and study any police reports before coming to a decision about your vehicle's worth. In most cases, they are highly-trained professionals who are experts in car valuation. You should never forget, however, that they work for the insurance company. Their job is to protect the company's financial bottom line and not yours. You are not obligated to accept their offer, but you have limited options to fight it.

How are Cars Valued?

Your car's value depends on several factors, including mileage, your geographic location, the vehicle's condition and its color. In addition to the Kelley Blue Book website, adjusters may consult the National Automotive Dealers Association and Edmunds. These three sources are considered the standard in automobile valuation and adjusters usually follow their recommendations.

High mileage cars have a lower value than similar vehicles with low mileage, although highway miles are easier on a car than city driving is. The constantly changing road conditions in town can damage your vehicle. You'll take a hit on value if you have put more than 12,000 miles each year on your ride. If your car is low-mileage, its value will reflect that, too.

A car's condition is harder to determine since the criteria are subjective. Sellers may think their slightly blemished, well-running vehicle is in "excellent" condition, while buyers might call it "good" instead. Minor issues such as scratches, dents, fabric rips and rust spots will affect your car's value. 

Location matters when it comes to your vehicle. Your sports car will be less valuable if you live in the Midwest rather than on the sunny and warm coasts. Likewise, your 4-wheel drive pickup will be less valuable in Florida than it would be in Wisconsin.

Certain options add more value than others. For instance, buyers enjoy a moon roof, automatic transmission and all-wheel drive, and these options raise the price of your car. Conversely, if your vehicle lacks items such as power locks and air conditioning, it loses desirability and value.

Customizing your car may negatively affect its worth. You may love oversized tires and a custom spoiler, but many people will not. This type of alteration can bring down a valuation.

Finally, car color impacts car value. The safe colors like blue and silver make it easier to sell a car at fair market value. Your bright orange paint job can make your vehicle worth less. An adjuster has to take all these factors into account before deciding the fair market value for your car and whether it is a total loss. 

When is a Vehicle Totaled?

You may think a totaled vehicle is one that cannot be fixed, but that's not true. A total loss vehicle is one that simply costs too much to fix to make it worthwhile according to the state or to the insurance company, depending on where you live. In fact, people sell totaled cars all the time at various markets, so mechanics can often repair them to some degree.

The formula for totaling a car varies depending on the state. In New York, a car is considered a total loss if it will cost 75% of its value to fix. In Texas, that percentage moves to at least 100% of the car's value. In states like Illinois and Georgia, the insurance company decides what percentage makes a vehicle a total loss. So the definition of a totaled car is not set in stone. It changes according to geography and authority.

When Are You Upside Down?

The value of your car drops significantly each year, especially when it is new. In the first year, you can expect your new vehicle's value to drop by 20%. In the next four years, you will see an annual drop of 10%. After five years your car may only be worth 40% of its purchase price. In fact, your new vehicle loses up to 11% of its value once you drive it off the lot. By the time you get home, you have technically lost money.

If you finance a new car, you may well owe more on it than it is worth by the end of the first year, if not sooner. When you owe more than the car's fair market value, you are "upside-down" in your loan. If your car is totaled while you are upside down, you can find yourself without a vehicle while still owing the bank thousands for your car. And the insurance company can take your totaled car to try and resell it on the secondary market even if you'd like to keep it.

This scenario is the worst case, of course. Your protection level depends on what type of insurance you have, and if you do not have enough, you can purchase more at any time. 

Liability Insurance

Most states require drivers to carry liability insurance, which gives you some protection when you are at fault in an accident. It doesn't cover your car's damages but does payout to the other driver. Liability insurance will not help you at all if your car is totaled or damaged. Most drivers of new or late model cars choose more coverage. If you owe money on your car, your lender will demand that you have more protection in order to protect their investment. 

Collision and Comprehensive Insurance

Although collision and comprehensive are two different types of insurance, many drivers buy both. Combined with liability insurance, they offer drivers a high level of protection.

Collision insurance covers repairs to your vehicle if it collides with another car or hits a tree or other object. Basically, it covers most traffic accidents.

Comprehensive insurance protects you from damage caused outside of collisions. It covers damages caused by fire, vandalism, falling branches and natural disasters. 

Collision and comprehensive insurance usually come with a deductible, so if you make a claim, even when your car is totaled, you will need to pay a set amount, often $500 - $1000. Your liability policy won't charge you a deductible.

Even if you have these recommended policies, you will usually need more money to replace your car when the insurance company declares it a total loss. 

Loan and Lease Gap Insurance

Loan and lease gap insurance is an excellent way to cover the difference between the cost of replacing your vehicle and its fair market value. It is especially beneficial for people who owe more on their car than it is worth. Gap insurance, also known as guaranteed auto protection, pays the difference between what you owe on the car and the insurance settlement. This type of insurance also works if you are leasing your car. You should consider purchasing gap insurance if one or more of the following factors applies to you:

• You put down less than 20% on your car when you purchased it.

• You lease your car instead of buying it.

• Your loan is for five years or more.

• You put a high number of miles on your vehicle each year.

• You own a car that depreciates quickly, like a BMW 7 Series.

Remember, gap insurance covers the difference between what you owe the bank or the dealership and the fair market value settlement you receive from the insurance company. For instance, your settlement might be for 22,000 but you owe the bank $24,000. Gap insurance pays that $2,000. You can still end up getting $22,000 for a car you bought for $30,000 several years ago. When you shop for a replacement, you can still end up taking a financial hit.

When you lease a car, gap insurance is highly recommended. In fact, leases often have gap insurance built-in as part of your contract. If you are buying a car, the choice is up to you. Your lender will not require that you buy it. But, if you are upside down in your car loan and do not have the cash on hand to pay the difference, then buying gap insurance is the sensible move.

How Much Insurance Do You Need?

When you are searching for car insurance, you need to consider how much and what type you need. You will never completely protect your car from accidents, but you can take away much of the risk. Most people opt for liability, collision and comprehensive insurance if they have a newer vehicle and/or they are still making payments on it. Even with that coverage, though, you could end up owing money if someone totals your car.

Buying the right amount of insurance can be tricky. You need to consider how much you owe on your car, the price of your monthly premium and the amount of your savings. Can you afford to replace your current vehicle with your current level of coverage?

How to Choose Insurance

PolicyScout makes finding the right level of insurance fast and easy. By simply entering some basic information, you'll find dozens of coverage choices, including liability, collision, comprehensive and gap insurance. You'll be able to see what plans you can afford and which will better protect your vehicle. And you'll be able to see if gap insurance is for you.

Too many people don't realize that a totaled car can lose them thousands of dollars, especially if they are upside down on their loans. If you have too much to lose, take action now to make sure you are covered in case of a total loss.