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How Does Insurance Work if Your Car is Totaled?

Accidents are scary, dangerous, and often expensive — especially if you walk away with a totaled car. But understanding what it means to have a car totaled and what your options are after the accident will help you get back on the road.

What Does it Mean If My Car Is Totaled?

Different states have laws that set different definitions for when is a car totaled, or declared that it is a total loss.

Some states decide that if your vehicle is damaged up to 50% of its value, the insurance company needs to write it off. Other states say that damage must be 100% of its value before it is totaled. Most are somewhere in between.

It is a good idea to check with your state insurance commissioner to know what you are dealing with if you get into a serious accident.

You may find yourself asking can insurance company force you to total your car, and the answer is yes — if the damage is sufficient.

That’s not to say that some magic event automatically leads to a totaled car. For example, some people think than once your airbags go off, it automatically leaves your car totaled. And that’s not strictly true.

Sure, airbags are expensive, and when they go off, it usually means there was a bad accident that needs to be fixed. But if that damage can be repaired for a small fraction of the vehicle’s value, you don’t have a totaled car.

Deciding whether your vehicle is totaled is really just a math formula that in the end decides whether, and how much insurance pays for totaled car.

Once your car is in a serious accident, your insurance adjuster will step in and give it a look. The adjuster’s goal is to figure out how much the vehicle was worth the moment before the accident. That is called actual cash value. If the damage exceeds the percentage of the actual cash value your state sets, then it is a total loss – it’s a totaled car.

Now, to be sure, the actual cash value is not the same as how much the vehicle cost when it was new, and it is certainly not the same as your outstanding loan balance.

The key to determining your actual cash value is to find out how much a willing buyer in your market would purchase your car for. That might be the price set in the guides, such as Kelly Blue Book, Edmunds, or the NADA. But it might also be set by finding how much comparable cars with comparable mileage, condition and features have sold for recently.

Doing your homework and arming yourself with information is key to getting the best settlement when the accident leaves your car totaled.

Man inspecting totaled car

How Does a Totaled Car Affect Financing?

So, what happens when you total a car that is being financed? Well, the answer can be a bit scary. A worst-case scenario is that you finance your vehicle for many years and then it depreciates faster than you are paying off the loan.

Say you bought it for $30,000, but are paying it off over six years. After year two, you may have only paid off your loan to $25,000, but the car depreciated down to $20,000.

If you then got into an accident where you ended up with a totaled car, your insurer would write that $20,000 total loss car insurance settlement, but not only would you never see a cent of it, but your finance company would come to you with a $5,000 bill.

Even though you don’t have the vehicle anymore, you still owe the bank the money you borrowed.

The same goes for a leased vehicle. If it is depreciating faster than your payments are covering the cost of the vehicle, you can be in trouble, even if the totalled car wasn’t your fault.

In many cases, that is why people buy GAP insurance.

GAP coverage is an acronym for guaranteed asset protection, and it covers you for the “gap” between what your car is worth and how much you owe on your loan. In many cases, your GAP coverage will also pay your collision deductible.

What Are the Next Steps if My Car Is Totaled?

After your car is totaled, the insurance company issues a check to you or the bank that gave you the loan. That check means the insurance company just bought it from you.

That may leave you wondering, “If my car is declared a total loss can I still drive it?” And, really, that depends.

Once the insurance company buys it from you, you have another decision to make. In some states you are allowed to buy your vehicle back from your insurer as a “salvage.”

Salvaged cars come with a little baggage — a salvage title. That means that in most states you cannot apply for new license plates until you prove that you have made the repairs necessary to make the vehicle safe to drive.

Most insurance companies are also reluctant to offer comprehensive and collision insurance on salvaged vehicles because they have no way of telling what its new actual cash value would be.

That said, you obviously can still get a state-minimum liability policy on it.

So, if your heart can’t let go of your first car, even though it is a totaled car, you technically can buy it back and make the repairs yourself — but buyer beware. It is important to compare multiple car insurance quotes before an accident like this happens so that you are covered in an accident. 

Should I Buy a New Car If My Old Car Is Totaled?

If your vehicle is totaled and you are not upside down on your loan, you are free to use the excess proceeds from your insurance to pay for your next vehicle’s down payment.

There are a few things to remember about how to get a new car after total loss, though.

First, remember, the insurer will only pay you for what your vehicle could have sold for the moment BEFORE the accident, so make sure you can find some comparable vehicles for sale for the insurance company to compare against so you can get the best possible payment.

If you are upside down on your loan, it would have been a very good idea to carry GAP insurance and made sure you have a few dollars tucked away for a down payment if the worst happened and you needed to buy a new car after a total loss.

That said, buying a new car after total-loss is not impossible. It just might mean you are going to have to come up with a bit of cash on your own to make the transaction happen.

What If My Totaled Car Wasn’t My Fault?

If the accident left your car totaled not at fault, then you also need to do some research.

One thing to keep in mind is that if the accident that left you with a totalled car was the other driver’s fault, you may be in a bit of a quandary depending on their coverage limits.

Say they only have $10,000 in liability coverage, and you are driving a $50,000 pickup. Their insurer will only pay up to that liability limit. It will then either be up to your insurer to pick up the difference through your underinsured motorist coverage, provided you have that as part of your collision coverage, or you need to consider suing the other driver for the difference.

If you are injured in a total loss accident and can’t work, it is common to pursue that other person’s insurance for your lost wages, or if they were underinsured, through your underinsured medical policy.

In a worst-case scenario, the other driver was clearly at fault, but completely uninsured. That is where your coverage called uninsured motorist property damage comes in.

So if you are in a state with a high percentage of uninsured drivers, it is a great idea to consider those extra coverage options for some added protection.

The important thing to remember is that if you are left with your car totaled, that doesn’t mean you are left without options. But it is always best to be prepared for it before it happens so you aren’t left with a nasty surprise.

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