beyond the wreck - the hidden costs of a totaled car

In a recent piece for Bloomberg Opinion, Chris Bryant highlighted a growing trend: more vehicles are being ‘totaled’ for insurance purposes. According to Bryant, “more than one-fifth of vehicles are now declared a write-off by insurers after examining claims; this is close to a record and around five times higher than in 1980.” If you happen to be a Bloomberg subscriber, you can access the full article here. For now, let’s explore what it really means when your car is ‘totaled’ by an insurance company and the often hidden financial implications that follow.

What does ‘totaling’ your car really mean?

First, what does it mean to have your car totaled? If your vehicle is damaged in a car accident or some other manner, such as a weather phenomenon (hail) or a wildlife incident, you will likely file a claim with an auto insurer. The insurer will estimate the cost of repairing your car to its state immediately before the incident. If the cost to repair your vehicle is over a certain percentage of the value immediately before the incident, they may decide to “total” your car. In other words, rather than paying for the repair, they may decide to pay you their estimate of the value of your vehicle immediately before the incident (less your deductible) rather than paying for repairs. In this case, the insurance company is essentially buying your car from you for the estimated value just before the incident (again, minus your deductible).

The financial impacts of a ‘totaled’ car

Here’s where the issues begin. To start with, what if your car is financed and the actual cash value is less than the amount you still owe? You will still need to pay off the loan to avoid any negative effect on your credit rating. The payout from the insurance company will go first to your lender. Then, you continue to be responsible for any outstanding loan balance after the insurer’s payment. GAP insurance can mitigate this, but that’s a topic for another day.

What if you don’t have the money for a new car?

One of the factors in this recent trend that Chris Bryant alluded to is that the cost of car repairs has skyrocketed, making it more likely that a car will be totaled after a seemingly minor accident. Newer cars have a multitude of sensors and other electronics that require very expensive parts and costly labor to install. These costs quickly add up, making it more likely that your recently purchased car could be ‘totaled’ a few years later for an event that initially appeared minor. As such, part of this trend is that more newer cars are being totaled.

hidden costs of a totaled carDepending on the deductible and the actual cash value of your car, as well as a possible compounding issue of any outstanding loan amount, you may find that the payout is not enough to allow you to buy a new car or have a large enough down payment to keep a similar loan payment on the new car. Or, you may even find that you are paying two car loans and have only one car because you still need to pay off the loan on the first vehicle.

Here’s an example. Another point in Chris Bryant’s article is that “AAA estimated the cost of replacing and calibrating a side mirror with a camera on a new F-150 pickup truck, for example, at an eye-watering $1,600.” If you add in the other damage likely done in a relatively minor accident and the cost of those repairs, including parts, labor, and additional calibration and coordination, you can see how quickly those costs can add up.

Loan Balances and Insurance Payouts

Consider the theoretical situation where you’ve been in an accident. Now imagine that you’ve driven your truck extensively while you’ve owned it, which has only been a short time. And even though you’ve kept it in great condition, it does have some scratches in and around the bed and fenders (it is a truck, after all). Though the scratches have no impact on the usability of the truck, those blemishes and the high mileage are taken into account when the insurer calculates its cash value. Imagine the price of the truck was $50,000, you financed $40,000, and you still owe $32,000. There is the possibility that they believe the actual cash value before the accident was only $22,000. If the estimated cost to repair it (just by the claims adjuster’s initial review) is $16,500, the insurer is likely to total your truck.

This means that your insurer will pay out $16,000 ($16,500 minus your $500 deductible) and take your truck. If you still owe a lender for your vehicle loan, the payout goes to the lender first, and you will get any amount left over. In this case, the payout goes to the lender, you still owe the lender an additional $16,000, and you still need to acquire another vehicle. You may need to come up with a down payment for another vehicle and then find yourself still paying off the totaled truck at the same time you’re paying a loan for the new vehicle.

The Value of Your Car: To You vs. The Insurance Company

Even if your car is older, you can end up in a tough spot. The insurer is only responsible for financially making you “whole” and only related to the specific asset covered. They are not insuring the value that your vehicle provides you on a daily basis. They are not covering your ability to go to work and earn a living. The insurer is only responsible for making you whole when it comes to the cash value of your vehicle – returning your vehicle to its estimated cash value immediately before an incident or paying you that cash value. You have to keep in mind that the actual value your vehicle provides specifically to you is different than the cash value, which is only the value for which you could likely sell it. The value to you could mean that you’re able to go to work, it could mean freedom to go where you want when you want, and it could mean the ability to haul large or heavy items for hobbies or allow for other leisure activities. The value of your vehicle to you is likely quite different than the value to the insurance company. This becomes painfully apparent if your car is totaled.

A Changing Environment

It’s important to consider that the environment has changed regarding what you can expect from auto insurance coverage. In the past, it was usually only older cars or cars with a reputation for being expensive to repair that would be totaled. Now, due to a combination of factors such as the advanced technology in our vehicles and a shortage of parts and labor, even relatively new cars are being totaled on a regular basis.

One last note: it is possible in some cases to buy your vehicle back from the insurer. However, this comes with some complications. The vehicle will then likely have a “salvage” title indicating that it was totaled for insurance purposes. You may use your own funds to get the vehicle repaired and drivable. However, the car will need to pass an inspection before it can be registered and driven again. In addition, most states require your vehicle to be insured. There are fewer insurers that will write insurance for cars with a salvage title, and the coverage tends to be much more expensive than standard auto insurance. If you end up in a situation where your vehicle is being totaled, be sure to consider the full long-term cost of electing to buy your car back from the insurer before pursuing that option.

Understanding the hidden costs and implications of having your car totaled by insurance is crucial. The financial impacts, potential loan obligations, and practical challenges can be significant. While insurance aims to make you whole financially, it often falls short of covering the broader personal and practical value your vehicle provides. By being informed, you can better navigate the aftermath of a totaled car and make decisions that minimize the financial burden.

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