In a Cris Answers article about full coverage, I talked briefly about the total vehicle value.
This is a huge issue if you have a brand new car or even a late model car.
In the case of an accident where your car is totaled, all vehicles are paid out as “Actual Cash Value”(ACV) rather than Replacement Cash Value (RCV).
What this means is that depreciation can be a killer! Automobile depreciation is the single most expensive cost of owning a new car.
Even cars that are well-maintained and kept in pristine condition will decrease in value over time. That’s why for many people, new car replacement or gap insurance is a great option.’
An Example of How Car Replacement Insurance Works
Let me give you an example so you can see how it works: let’s say you recently bought a brand new GMC Yukon XL for $68,000.
You have to carry comprehensive and collision coverage with deductibles of $500 because you’re financing it with no money down.
You shake hands with the salesman, get in your brand new Yukon XL and drive it off the lot.
At the first intersection, just yards away from the dealership, you accidentally turn left on green light instead of a green arrow and cause a wreck.
The brand new GMC Yukon XL is totaled in the accident. The value of a brand new car like this could depreciate as much as 11%, or in this example, $7,480 the moment you drive it off the lot.
That means your insurance company will pay you $60,520 minus your deductible of $500 so the actual payoff is $60,020. That’s $7,980 you still owe the finance company, and now you have to go buy another car as well!
How Do I Know What I Have?
Now make sure you take note of this: unless you have a specific endorsement such as “New Car Replacement,” which many insurance carriers offer, and your vehicle is totaled, you will be paid the ACV, not the RCV.
It does not matter what insurance company you are dealing with. In your insurance policy right now, there is a section that lays this out in black and white.
The problem is most people have never read their policy, so they are under the impression that if their new car is totaled, they’ll be paid to replace it.
How is My ACV Figured?
So, how do they figure the ACV of your car?
Well, it’s usually based on the National Automobile Dealers Association (NADA) value.
However, some of your more price-driven insurance companies will use different values, and it usually doesn’t work out for your benefit as much as it does their bottom line.
Meaning, if they’re using a different value system, there’s a good chance it will pay you less, not more than NADA value.
If you’re shopping insurance companies, you should ask them what value system they use for totaled vehicles.
That way, you’ll know at claim time what to expect.
The tricky part is that cars are always depreciating in value , so your car you might have looked up in 2014 on the NADA is not worth the same as it is right now, but you can go on their website and get a range of what your car should be worth in the even it is totaled in an accident.
Getting the New Car Replacement Option
Earlier, I mentioned the New Car Replacement option, so here’s how it works.
New Car Replacement will pay you the replacement cost of your vehicle, so it can cover the depreciated value of your vehicle.
However, these endorsements are not free.
This option costs you more, usually quite a bit more, because you’re asking your insurance company to assume all the risk for the depreciated value of the car.
New Car Replacement will only cover the vehicles you specifically select and that qualify.
Plus most of the time, New Car Replacement endorsements are only available for the newest model year available, and a lot of times, they’re only good for one year or maybe two, depending on your insurance company.
A New Car Replacement Option Example
Let me give you an example: If you go buy a brand new 2016 vehicle in early 2017 to save some money, you can save some money at the dealership, but you will not be eligible for New Car Replacement.
Also if you purchase New Car Replacement for a brand new 2017 vehicle, there’s a good chance that in 2018 that coverage will automatically drop to Actual Cash Value because it’s technically not a “new car” any longer.
What Should I Do?
Well, it depends.
If you’re buying a new car, it’s probably worth it to at least get a quote for new car replacement.
See if your new car qualifies, see how much the additional coverage is and how long it will stay in force.
Sometimes gap insurance is available from your insurance company or even the financing company at the dealership can be a more cost-effective way to go make sure you don’t end up upside down on your car loan.
Gap insurance can be more cost-effective than new car replacement most of the time, but you should crunch the numbers to see for yourself.