Car Sales 9

How Do Insurance Companies Value a Car?

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How do insurance companies value a car? When making insurance claims, you may wonder whether your policy will pay for your vehicle’s damages, or just consider it a total loss. At the end of the day, it all depends on how your provider values your auto. Providers typically use the actual cash value (ACV), in fact. In this article, we explore how your insurance company calculates this value and how you can dispute its valuation.

If you’re switching insurance companies or looking to buy a policy for a new car, you’ll find our expert review of the best car insurance companies helpful. Put our research to good use by entering your zip code into our quote box. Then get free quotes from top insurance providers in your area.

What is the Actual Cash Value of a Car?

The actual cash value (ACV) is usually the value of your auto right before the accident or any other type of damage. The ACV is partially determined by your accident history, but other factors are involved, including your car’s:

  • Make
  • Model
  • Year
  • Mileage
  • Usage
  • Mechanical condition
  • Depreciation

Depreciation plays a key role in the value of your vehicle, as cars depreciate quickly, especially in the first years of ownership. Because of depreciation and other factors, your car’s ACV will likely be at least several thousand dollars less than you paid for it. The difference between the ACV and your purchase price will likely be even greater if you bought the car new. After all, a used car will have depreciated somewhat before you bought it.

How Do Insurance Companies Calculate the ACV?

The downside of the ACV is that there isn’t a universal formula. Every insurance company has its own method. Some use proprietary formulas, while others use formulas from third parties. 

On top of that, insurance companies don’t release information about those formulas, so you can’t easily predict what your insurer considers your car’s ACV – not accurately, at least. 

One thing you can count on are insurance companies paying close attention to the age of your car, and choosing their own numbers when calculating its depreciation.

How Much Does Your Car Depreciate in Value?

On average, vehicles tend to depreciate 15 to 20% within the first year. Brand new cars could depreciate even more. Depending on the make and model of the vehicle, new autos can depreciate up to 35% in the first year.

In the first five years, many cars depreciate each year by 15% – which means that within five years, the value of the car can go down 40% or more from the original value. Here is a more visual example of a five-year depreciation of a brand new 2022 Hyundai Sonata.

Age of VehicleDepreciation PercentageValue Lost*Current Value
Brand New0%None$24,500
1 year20%$4,900$19,600
2 years15%$2,940$16,660
3 years15%$2,500$14,160
4 years15%$2,124$12,036
5 years15%$1,805$10,231
*Every value lost (after $4,900) is a percentage from the previous value of the year before, not the original value of the vehicle. [Ex. $2,940 is 15% of $19,600, not $24,500]

The Sonata’s current value is $10,231 – five years after its original purchase, which is almost 42% less than the value it was before it was driven off the lot. 

But even if you yourself have a 2022 Hyundai Sonata, you can’t count on using just this chart as a way to know your car’s ACV if you have to file a claim one to five years from now. This is just a general depreciation table based on industry averages, and there are many different factors that go into the specific depreciation and ACV of autos.

How to Get an Idea of the Most Accurate ACV of Your Auto

While you won’t know the ACV your insurance provider calculates until the agent shares it with you, you can get an approximate figure with some research. That research will also give you information to use if you have to negotiate with your insurance company.

Look Up Estimated Values on KBB or Similar

The easiest method to get an estimate would be to look up your auto on Kelley Blue Book (KBB) or the National Automobile Dealers Association (NADA). These databases both include adjustments for condition. But you will still only get an estimate, as your insurance company will consider more factors than these databases can account for.

Look at Comparable Models for Sale        

You can also look at similar autos that are for sale. For this to be accurate, look for an auto that is as similar to yours as possible, including the make, model, mileage and condition.

How Can I Dispute My Auto Insurance Company’s Valuation?

Insurance companies are there to make money, so they may calculate a lower ACV than you think is appropriate for your auto. The good news is that you can dispute their valuation if you disagree with it.

Research Appropriate Prices

You will need to show your insurance company proof that their valuation is incorrect to successfully get them to change it. This involves the same two methods of estimating the ACV mentioned above. Look at comparable autos for sale near you and look at databases like KBB and NADA.

Save the information that you find as proof. Make sure to focus on autos sold by dealerships – not private sellers. The prices from dealerships are what is relevant to the ACV and your insurance company.

Consider an Appraisal at a Dealership

Another good option is to bring your auto to a reliable dealership to have them appraise it for you. This type of professional appraisal is hard for insurance to argue against.

What You Can Do in Case Insurance Companies Don’t Value Your Car Enough

If your car is new, the ACV will likely be much less than what you originally paid for it. This can lead to issues if your auto gets totaled. Not only will it seem as if you wasted money, but you may still have an auto loan balance to pay off on a vehicle you can’t drive. There are some precautions you can take to ensure you don’t have to pay all of this completely out of pocket.

Gap Insurance

When an insurance company doesn’t value your car enough, Gap insurance will pay any difference between what insurance gives you for your totaled car and what you still owe on your loan. So let’s say you get a lease on a new car for $40,000:

  • After one year, it depreciates in value by 20% to $32,000.
  • You’ve paid $6,000 off your car loan, which means you still owe $34,000.
  • Your car becomes totaled, and the collision insurance on your policy only pays the depreciated value of the vehicle ($32,000).
  • So, you still have $2,000 that you owe to your lender.

If you don’t have gap insurance, you’ll have to pay this out of pocket – but if you have gap insurance, that $2,000 will be taken care of. Gap coverage is worth considering for new cars, especially. It may also make sense for used vehicles, depending on their prices.

New Replacement Coverage

This type of coverage will give you enough money to replace your totaled auto with an identical, new auto. But it is only available in very limited situations. If you bought a brand new car out of pocket, you may want to consider this option.

Let’s say you buy a car for $25,000:

  • After two years of having it, it depreciates to $17,000.
  • You get into a car accident and now have a totaled vehicle.
  • Your insurance policy only covers the depreciated value of $17,000.
  • With new replacement coverage, you’d get that $8,000.

After getting a full insurance payout by your auto insurer, you can go out and buy a brand new car of a similar make and model. With nothing to cover that replacement cost, you’d have to pay $8,000 out of pocket again to get that similar car you wanted, or find a cheaper option. This is a good coverage type to consider in case your insurance company doesn’t value your car enough.

Our Recommendations for Auto Insurance

We suggest considering auto insurance from GEICO, USAA and State Farm. These providers topped our industry-wide review for having competitive rates, excellent customer service and comprehensive coverage. Below is a table of our categories that we use to calculate overall ratings of each company. Each rating is out of 10.

Insurance ProviderState FarmUSAAGeico
Industry Standing5.04.54.9
Customer Service4.54.34.3
Online Experience5.04.94.7
Overall Rating4.64.54.4

Quote calculators can be effective tools when looking to buy insurance. You can use our comparison tool to look at quotes from GEICO, USAA, State Farm and other top insurers in your area. Enter your zip code in our quote box below to get started.

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GEICO: Most Discount Options

J.D. Power rating: 853/1,000

BBB rating: A+

GEICO earned the title of Most Discount Options for offering tons of discounts on top of various coverage options and some of the lowest rates in the industry. GEICO’s rating in the 2022 J.D. Power U.S. Insurance Shopping StudySM puts it below the industry’s average, but the company holds many benefits that policyholders can take advantage of.

For extra savings with GEICO, consider an auto with anti-lock brakes, an anti-theft system and daytime running lights. You can also take advantage of other discounts like those for good drivers, federal employees or just those who buy new vehicles.

USAA: Best for Military

J.D. Power rating: 875/1,000

BBB rating: A+

USAA is our choice as the best provider for military members, veterans and their immediate families. To get additional savings with your auto policy, you can take advantage of discounts by bundling homeowner or renters’ insurance, being a good student and taking a driving course. You can even save money on insurance just from buying a new vehicle or putting multiple vehicles on your policy.

State Farm: Best Customer Experience

J.D. Power rating: 885/1,000

BBB rating: A

State Farm’s J.D. Power rating puts it in first place for overall customer satisfaction among large insurers. Our analysis found that State Farm also has the best customer experience. In addition to 25% off for good students, State Farm offers discounts for people with defensive driving courses, clean driving histories and policy bundles.

FAQ: How Do Insurance Companies Value a Car?

How do insurance companies determine the actual cash value of a car?

Every insurance company will use a slightly different formula to calculate the ACV of your car. It can include the year, model, make, wear and tear, mileage, previous accidents and other factors.

How does insurance determine a total loss?

Every insurance company will have a threshold for considering an auto a total loss. This will be a percentage of the auto’s total value, and if the damages cost more than this, the car is a total loss. Depending on your state, your insurer may have to follow state laws for this percentage.

Will insurance pay for my car’s retail or trade-in value?

The actual cash value that insurance uses for your auto is much closer to the retail value than the trade-in value.

How can I get the most money from insurance for a totaled car?

The best way to get the most money from insurance on a totaled car is to argue that your auto is worth more. Your insurance company will likely want to minimize your auto’s actual cash value to reduce the amount they have to pay, so you may have to negotiate to get a fair amount.