With the convenience of our daily driving comes the possibility and inconvenience of being involved in an auto accident. A total loss is possible, depending on what you’re driving and the extent of damage. But what exactly is a total loss? And do you know how to protect yourself from the financial consequences of such a loss?
The insurance industry typically defines a total loss vehicle as when the cost to repair the damages sustained in the loss meets or exceeds 75 percent of the vehicle’s actual cash value (ACV) and/or is otherwise impractical to repair. The ACV is essentially defined as replacement cost minus depreciation. Virtually all vehicles depreciate with every passing year and with increasing mileage. The purpose of an insurance policy is to indemnify, or in other words, put one back in the same position they were before the loss. By paying the actual cash value, you are being compensated for the value of the vehicle based on its current condition, age, and mileage. While this is a good thing, there may be an alternative available.
The alternative is something most people have heard of and applies to a financed vehicle; it’s called guaranteed asset protection or GAP coverage. GAP covers the unpaid balance of your loan (typically up to 150 percent) over the ACV. This prevents you from having to make payments on a vehicle you no longer possess or from rolling that unpaid balance into the financing of a replacement vehicle. It all but pays for itself in the event that you lose your vehicle to a total loss and you owe more on your vehicle than it is worth. Typically, you can purchase this at the dealership when you buy your vehicle or from your insurance company, if available, for an additional premium.
If you are thinking of buying a new vehicle this may very well save you a lot of money and frustration in the event of a total loss.