Being involved in a car accident is stressful enough without having to worry about how you’ll pay for a new car. Thankfully, having auto insurance can help relieve some of that stress. While your insurance can help you pay for a new vehicle, the amount your insurance will pay after a total loss can vary depending on whether you have a standard actual cash value (ACV) policy or if you’ve added a replacement cost (RC) endorsement.
It's important to understand your ACV policy and how adding a replacement cost (RC) endorsement can impact your claim payout. Below, we’ll explain their differences, the pros and cons of both and how to choose the right option for you.
What is Actual Cash Value (ACV) in auto insurance?
To put it simply, ACV is your vehicle's market value minus depreciation at the time of loss. This is the standard for most auto insurance policies which means ACV is paid for total losses by default. How an insurer determines your vehicle’s ACV can vary from company to company.
With Integrity, when a vehicle is declared a total loss, a complete description of the vehicle is submitted to a specialized third-party vendor who researches the local market. This vendor then conducts a comprehensive analysis considering several key factors, including comparable vehicles for sale in your area, recently sold similar vehicles, the specific options and features of your vehicle, its mileage at the time of loss and its overall physical condition before the accident. When assessing your vehicle’s overall physical condition, unrelated prior damage will be factored into the ACV determination to ensure proper disclosure.
So, if you bought a new car three years ago and it’s totaled in an accident today, you won’t get back that original price you paid at the dealership. Instead, you’ll be paid the ACV determined by the insurance company.
For example, if it’s determined that your vehicle’s ACV is $18,000 and you have a $500 deductible, then you’ll get back $17,500 (minus state sales tax and other applicable fees and taxes) for the car you paid $30,000 for three years ago. It’s important to note that if you still have an auto loan at the time of an accident, your insurance payout may go to your lender first. They’ll use it to pay off the remaining balance before any money comes to you.
Pros of having a standard ACV auto insurance policy
- Standard coverage: Most auto insurance policies use ACV, so there’s no need to add extra endorsements.
- Affordable protection: Offers a balance of coverage and cost for drivers who don’t need full replacement value.
Cons of having a standard ACV auto insurance policy
- Depreciation deducted: Your payout reflects your car’s current market value, not what you originally paid.
- May not cover loan/lease balance: If you owe more on your car than it’s worth, ACV might not cover the balance.
- Less predictable payouts: Market value calculations can vary, making the settlement amount less certain.
What is Replacement Cost (RC) coverage for cars?
Replacement Cost (RC) insurance is the value of the vehicle without a deduction for depreciation and is typically only available when specifically added as an endorsement to your policy. So, if you’ve been driving your brand-new car for a week and then you get into an accident that totals your vehicle, the settlement will cover the value of the car, minus your deductible, sales tax and other applicable fees.
Again, in certain cases you may not see the payout directly. If you’ve taken an auto loan out to pay for your car or if there’s a lien on your vehicle, your claim payout will go directly to your lender or lien holder to help cover the balance.
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Pros of a replacement cost endorsement for auto insurance
- Eligibility for additional payouts: Because RC is typically an endorsement you add onto an ACV policy, depreciation is still considered when determining your claim settlement, however, you could still receive additional payouts for your vehicle that you wouldn’t necessarily get with just a standard ACV policy.
- Great for newer vehicles, electric vehicles and high-demand models.
Cons of a replacement cost endorsement for auto insurance
- Higher premiums: Monthly or annual insurance costs are typically higher compared to ACV policies because you are paying for an additional endorsement.
- Limited availability: Often only available for cars under a certain age.
- May require additional insurance endorsements: RC is not standard on most auto insurance policies, so you might need to add it as extra coverage.
Integrity offers two replacement cost endorsements:
- New auto coverage: Available for vehicles two years old or newer. Instead of receiving just your vehicle's ACV, this coverage can help cover the value of a new or similar model. Payouts vary depending on your auto loan balance or if a lien is placed on your vehicle.
- Total loss upgrade coverage: An optional endorsement that pays beyond standard ACV when your vehicle is declared a total loss.
How does gap insurance compare to replacement cost insurance?
If you get into an accident and your vehicle is totaled, a gap insurance endorsement can help cover the difference between the ACV of your vehicle, minus the deductible, and the unpaid balance left on your loan or lease. Replacement cost will only cover the value of a new car, minus your deductible.
While you may be required by your lender or leasing company to get gap insurance, even if you aren’t, there are a few reasons why purchasing gap insurance is a good idea. According to Experian, you should consider adding the endorsement to your insurance policy if:
- Your down payment on your car was less than 20%
- Your loan lasts five years or more
- You purchased a car that depreciates rapidly
- You're in the first year or two of making loan payment
- You couldn't afford to cover the gap yourself
- You must have comprehensive and collision insurance to purchase gap insurance
Gap insurance can offer additional peace of mind, but it’s important to understand that claim payouts vary. If someone has more negative equity than the car is worth, the payout may not cover their entire loan. The settlement goes toward the vehicle’s value only, so any remaining negative equity could still leave a balance on the loan.
The right coverage for you depends on your unique insurance needs and the amount of risk you are comfortable taking on. Talk to your Integrity Independent Insurance Agent today to figure out what option is best for you.
References
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Experian
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Carchex
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Business Insider
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WalletHub
Coverages described herein may not be available in all states. Please contact a local independent Integrity agent for complete details on coverages and discounts. If the policy coverage descriptions herein conflict with the language in the policy, the language in the policy applies. The material provided above is for informational, educational, or suggestion purposes and does not imply coverage. WE RESERVE THE RIGHT TO REFUSE TO QUOTE ANY INDIVIDUAL PREMIUM RATE FOR THE INSURANCE HEREIN ADVERTISED. Integrity Insurance policies are underwritten by Integrity Insurance Company, an affiliate of Grange Insurance Company, and Integrity’s subsidiaries. Integrity companies not licensed in Pennsylvania. Not all Integrity companies are licensed in all states.