If the cost to repair your car is close to its value, the insurance company may deem it to be a total loss. Here's what you need to know to make the best out of a totaled car.
Car accidents are never a good thing. They're especially bad when your car is undriveable. When a car's damages are beyond repair, it's considered a total loss. That means the cost to repair the vehicle is close to or higher than its value.
If your car is totaled in an accident, insurance pays you for the car's estimated value. But there are several different methods insurers use to estimate the price of a total loss car. There are also several steps you can take to be sure that your car gets an accurate valuation.
Here's the basic gist: when the cost to repair a car comes close to the car's value, it's probably totaled. However, some states have specific rules for totaled cars. Each insurance company uses their own approaches, as well.
First, it's important to determine your car's value. Insurers use actual cash value, also known as fair market value. This number is essentially the amount your car (before the accident) would cost in an open market. In other words, it's the cars replacement cost, minus depreciation. As an example, here's how GEICO determines a car's market value:
Once the insurer determines a pre-accident market value for your vehicle, it's time to assess the repair cost. First, the insurer will connect you with a claims adjuster. They will assess the damage and estimate the cost of repair.
Insurance companies also use software to price a repair. Mitchell Estimating, for example, has extensive information on parts and labor costs for thousands of cars.
Once the insurer establishes the value of your car and the cost of damages, it's time to decide if the car is totaled. These are the two most common methods to determine if a car is totaled:
Insurers will automatically declare a car totaled if the damage exceeds a set percentage of the cars actual cash value. That percentage – known as the Total Loss Threshold (TLT) -- is usually dictated by state law. In many states, it's 75 percent – sometimes referred to as the ¾ ratio. As an example, let's pretend your car is worth $20,000. If the cost to repair the damages is $15,000 or higher, your car is totaled. If the damages are less than 75 percent of the car's market value, it's repairable.
The 75 percent rule isn't a guarantee. Each state has different requirements. In Texas, for example, the damage threshold is 100 percent. That means the repair cost must meet or exceed the car's actual cash value.
In states with no TLT requirements like Arizona, insurers may use an equation to determine a car's reparability. This is the basic equation: cost of repair + salvage value > actual cash value. If the cost to repair the car plus its salvage value is greater than the car's initial market value, it's considered a total loss. For more information on salvage cars, read our article on how to insure a salvaged vehicle.
Once the insurer declares your car totaled, it's time to talk payouts. Your payout depends on how the insurer and state handles a totaled car. It also depends on the extent of damage, and the cost of repairs. There are a few important factors to consider:
Disagreements between policyholders and insurers are common. There is an element of subjectivity when valuing a car, so disputes are natural. This is especially true if you have an unusual or collector's car. If your car is wrecked and you don't agree with the insurer's findings, here's how to fight back:
A: Yes. After it's totaled, you have the option to keep the car. The insurance company will subtract the salvage value from the car's market value. The salvage value is the amount a salvage yard will pay for the damaged car. If you keep the car, it will have a salvage title.
A: You can negotiate with them. Ask for a total loss report. It's a document that outlines their calculations. If you disagree with their valuation, you have a few options. You can use Kelly Blue Book, hire an appraiser, or get estimates from auto body shops. If there's a big discrepancy, your insurer may reconsider their findings.
A: Unfortunately, no. Your insurer will only pay you the car's current market value. That does not account for unpaid loans. Cars – especially brand-new ones – depreciate relatively quickly. If you owe money on your car and it's totaled, you're going to be in a tough spot. That's what gap insurance is for. It covers the gap between the car's value, and what you owe. It's especially important when buying a new car.
A: It depends on the insurer. It can take as little as a few weeks or as long as several months. Contact the insurance company. They can give you updates throughout the process.
A: It's a popular misconception that a car is automatically totaled if air bags are deployed. That's because replacing air bags is costly. It includes the airbag itself, the sensors, and the system. Don't forget to add in the collision repairs.
The cost to replace an airbag ranges between $1,000 to $6,000. If you have an older car and the air bags deploy, it's probably going to be totaled. But with newer cars, replacing the air bags may be financially viable. Especially if the accident itself was minor.
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