Actual Value and Total Loss: What Is the Difference?

Perhaps one of the most frequently misunderstood aspects of auto insurance is the difference between actual value and a total loss.

A total loss is when the cost to return the vehicle to pre-accident condition would be as much – or more – than the value of the automobile. It’s important to learn how total loss is determined, in order to make sure you obtain the proper protection when purchasing your next auto policy.

It’s also important before purchasing a policy to understand actual cash value (ACV) as it’s related to a total loss. Otherwise, you might find yourself underinsured in the event of a major claim.

Many auto owners mistakenly believe the insurance will pay off the existing loan or cover the entire cost of purchasing a new car, but that is rarely the case. Instead, insurance underwriters estimate the value based upon the Kelley Blue Book, Edmunds or National Automobile Dealers Association guides, then modify the quote to reflect the mileage, condition and other options for the vehicle. In most instances, this is significantly less than the cost to purchase a new vehicle or even pay off an existing loan.

Most new vehicles lose a significant amount of value as soon as they are driven off the lot. The trade-in value would be substantially less, even if you only owned the vehicle for a short period of time. Likewise, the actual cash value of a vehicle is often much less than the amount owed or even the cost to purchase a similar car.