How Does an Auto Insurance Company Determine the Payoff for a Totaled Vehicle?

Having your car totaled in an accident is not a pleasant experience, and working with your insurance company to get the value out of you lost vehicle can add to the pain. The insurance company should pay you what your car is worth. This value may be significantly different from the payoff value of your car loan.

Fair Market Value

When a car is totaled for insurance purposes, the insurance company should pay the replacement or fair market value of the car. This value is what it would cost to buy the same model with similar features and mileage in your area. The insurance payout for the totaled car will include the sales tax and registration fees that must be paid to buy a replacement car. Bottom line, the insurance payment for a totaled car should be enough money to buy the same car from a dealer in your area and drive the car off the lot.

Negotiating the FMV

The insurance adjuster will research the value of your car using dealer-advertised prices and blue book pricing information. When the adjuster presents you with the fair market value the company wants to pay for your car, the pricing research should be included. You can negotiate for a higher insurance payout if you can show reasons why the adjuster underestimated the value of your car. The adjuster may have used out-of-date or out-of-your-region pricing data. Another reason to negotiate is if the cars the adjuster used were significantly different from your car, such as ones with lower mileage or fewer options.

Outstanding Car Loan

The insurance company does not consider how much you owe on the car when determining the value of a totaled vehicle. If you have a loan or lease on the vehicle, the loan must be paid off with the insurance proceeds. Any extra money can be used as a down payment on a new car. For example, say the insurance company will pay $16,000 for your lost car. If you have a $12,000 loan balance, the extra $4,000 can be used as a partial payment for another car. However, if your loan balance is $20,000, the car loan lender will take the $16,000 in insurance money, and you will still owe another $4,000.

Gap Insurance

It is not uncommon to have a car loan or lease payoff amount that is greater than the value of a car. This "upside down" situation can be financially damaging if the financed car is totaled in an accident. Gap insurance sold by car dealers and third-party companies will pay the difference between a car loan/lease payoff and the insurance payout if the car is worth less than the loan. Of course, after an accident is not the time to learn about Gap insurance. If you have experienced financial hardship due to a totaled vehicle, look at Gap insurance with your next vehicle purchase.

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