If you have a car wreck, then you might want your car insurance to help you pay for the repairs. If you have the appropriate physical damage insurance on your policy, then you will likely have this assistance available. However, what many people don’t realize is that even though their plan might pay for some of their repairs, it might not pay for all of them.
All car insurance policies set limits on how much they will pay you for any given claim. These terms will affect both how much they will pay for partial damage and how much they will pay you when your car is a total loss. Even in total loss scenarios, you might not receive compensation for 100% of the value of a brand-new vehicle. It will all depend on the terms of this coverage.
When calculating the value of totaled cars, most insurers use either its replacement cost value (RCV) or actual cash value (ACV). Let’s take a closer look at these terms and how they affect your plan. We’ll also consider a few other conditions that might affect how much your plan will pay damage or total losses.
Replacement Cost Value (RCV) Coverage
A car’s replacement cost value is its like-new value. Most cars depreciate as soon as the buyers drive them off the lot. However, if your auto policy contains RCV coverage, this depreciation will not be a factor that your insurer will consider when calculating how much to pay you for a damaged car.
Instead, they will base your settlement on the value of a like-new vehicle of similar make and model to your former car. However, different insurers might define this value differently. Usually, this value will be determined using the vehicle’s manufacturer-suggested retail price, or MSRP.
RCV is not necessarily the sticker price you pay for the car, nor is it the value of your loan. As a result, you might not be able to buy the same car, brand new, without paying something out of pocket because the sticker price of a newer version of that car might have increased.
Replacement cost value policies have their limits. Some will not apply to your car indefinitely and might expire after 3 – 5 years. At this time, your policy might downgrade to an actual cash value policy.
Actual Cash Value (ACV) Coverage
Unlike replacement cost value, a car’s actual cash value is the vehicle’s value at the time a claim occurs.
Since cars depreciate, then a six-year-old car is likely worth several thousand dollars less than a brand-new car. So, if you total the six-year-old vehicle, and your auto policy pays based on actual cash value, then you are likely to receive a substantially lower settlement that does not represent the cost necessary to buy a new car. However, you can still use the settlement to put towards the new car purchase if you choose.
If an older car only sustains damage, and is not totaled, then insurers will not consider actual cash value when compensating you for the repairs. However, if you have an older car, then your insurer might have a higher likelihood of totaling a car with minor damage instead of paying you to repair it.
If you total a car while you still have a loan on it, then you might still be stuck paying off the note if a cash value policy won’t cover it. However, there is a solution available through gap insurance. This coverage helps you pay the difference between a cash value settlement and the remaining value on a car loan. Therefore, you can get out from under that financial obligation.
Do Deductibles Apply?
Though this is not true of all auto policies, many insurers will include deductibles on both RCV and ACV policies. A deductible is a dollar amount that you will agree to pay for repairs or a replacement vehicle on your own. Your insurer will begin to pay only after a claim amount exceeds that deductible value.
So, suppose you have an RCV policy that includes a $1,000 deductible. If your insurer calculates the car’s RCV at $24,000, then they will only pay you $23,000 in a settlement because of this deductible.
Where deductibles can get tricky, however, is under an ACV policy. If an insurer totals your car, and the car’s value is below the cost of your deductible, then you might receive no settlement at all. If you have a $2,500 deductible, but you only have a car worth $2,000, then what your insurer would pay you is less than the deductible cost. The insurer might not pay at all as a result.
To learn more about the ways that unique ACV and RCV policies will insure you and your vehicle, speak to one of our agents. We’ll work with you to determine the most straightforward way to ensure you receive an adequate financial settlement for any vehicle loss. You can rely on us to have your best needs at heart.
Also Read: Understanding Florida’s No-Fault Insurance Laws
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