How does new car replacement work?

Actual cash value in car insurance is the amount a car is worth after taking factors such as age, mileage, and cosmetic damage into account. A vehicle’s actual cash value (ACV) is calculated by subtracting the vehicle’s depreciation from its original price.

Most car insurance policies will pay a vehicle’s actual cash value if the vehicle is ... read full answertotaled in a covered scenario. In this case, the ACV will reflect how much the car was worth immediately before the damage occurred.

Example of Actual Cash Value in Car Insurance

• You purchase a new car for $20,000.
• On the way home from the dealership, another driver hits you and totals your car.
• You receive a payout for $18,000, the car’s actual cash value.

Even though you just paid the sticker price for this car, the actual cash value reflects the fact that it was technically a used car right before the accident. In fact, the average car depreciates about 15% - 20% in the first year of ownership and 9% - 11% just for driving off the lot.

How to Get More Than a Car’s ACV From an Insurance Payout

If you want to receive more than a vehicle’s actual cash value in the event of a total loss, you can opt for a policy add-on like new car replacement or gap insurance. But bear in mind that these options will increase your premium since the insurer is agreeing to pay you more if you file a total loss claim.

You may have anywhere from 2 to 30 days to tell your insurance company that you bought a new car if you are already insured, depending on financing and coverage details. If you don’t have car insurance already, you’ll need to get a new policy before you can legally drive your new car. Most car dealerships require ... read full answerproof of insurance to drive off the lot, so you’ll have to do some planning.

Either way, it’s wise to get car insurance quotes for different vehicles before buying one. That way, you’ll have a sense of which make and model is likely to increase or decrease your premium the most. At the very least, it’s something to take into account when picking your new car.

If you have an existing car insurance policy, there are two common grace periods for getting insurance on a new car:

• 2 to 4 days is common if you are adding a new car to an existing policy. Most car insurance companies will extend coverage to the new car in good faith, since it is usually required to get a loan. Such policies are designed to allow you to drive your new car home and make a call to your insurer quickly thereafter.
• 7 to 30 days is common if you are replacing a covered vehicle with a new car you purchased outright. In these cases, you can probably expect to have the same level of coverage as before. If you had liability-only coverage on the car you’re replacing, your new car would also have liability-only coverage.

Your policy term will transfer to the new vehicle in most cases, so you won’t have to start over with a new six-month or one-year policy.

If you are financing or leasing a new car, you may also want to consider adding gap insurance to your policy. Gap insurance will help pay the difference between the car’s market value and what you owe on your loan. Although collision coverage will pay fair market value for a totaled car, that may end up being less than you owe if you total your new car right away.

No matter how much time your insurance company gives you to get insurance on a new car, it’s best to reach out as soon as possible. Coverage specifics vary widely depending on state laws, insurance company rules, and individual policy provisions. If you miss a deadline, you could end up driving uninsured, which could result in legal fees, higher car insurance premiums, loss of your driver’s license, and more.

GEICO will declare a vehicle a total loss if 1) it is too damaged to be safely repaired, 2) repairs would cost more than the vehicle is worth, or 3) the damage meets the total loss guidelines of the state where it’s insured.

GEICO determines a vehicle’s worth by calculating its “... read full answeractual cash value.” Actual cash value is based on your vehicle’s make and model, mileage, features, add-ons, and condition prior to the accident. It also takes into account how much similar vehicles have sold for recently in your area.

Many states set a total loss threshold, which is the level of damage at which an insurer like GEICO must legally declare a car a total loss. The level of damage is expressed as a percentage of the car’s actual cash value. Depending on the state, the threshold can be from 50% to 100%. For example, a car with damage equaling 50% of its value is totaled in Iowa but considered repairable in Texas, where the threshold is 100%.

Twenty-two states have no specific total loss threshold but rely on a total loss formula. In these states, GEICO must total your car if the cost of repairs plus the vehicle’s scrap value equals or exceeds its actual cash value.

All these different rules can seem a little confusing, which is why car owners are sometimes surprised when their car is totaled.

Only your GEICO auto damage adjuster can decide to total a vehicle, after inspecting it. Your adjuster will contact you within three days of the inspection to review the proposed settlement amount. GEICO will issue payment, generally within 10 business days, to you or to your leasing or financing company.