We all pay it every month; the dreaded car insurance premium. For many of us we never even consider our car insurance beyond that monthly payment. What are we paying for, what is covered and more importantly what is not. Beyond the difference between Third Party Liability or Total Coverage, there is usually a big blank. Recently a dear friend and client had a total loss to his Ford pickup truck and he and I both learned a lot from that ill fated event. His truck was parked next to a shed that caught fire and totally destroyed both the structure and the automobile in the process.
His truck was a 2008 with less than 20K miles in excellent condition. The balance owed to the bank was $31,000.00 after 1.5 years of payments and interest. His insurance company returned with a value of his truck of $21,000.00 leaving him with no car and a deficiency to the bank of $10,000.00. Now I’m no insurance expert but that seemed a little out of sync, so I questioned him further on the reasoning why the huge gap between the insurance value and what the truck was really worth.
The answer was simple and yet so clarifying as I found out; it’s all about the upfront savings on the insurance policy. Insurance companies/ agents will often times encourage a lower ACV or actual cash value to keep the monthly insurance premiums as low as possible. While this sounds good it’s actually a bad thing if your vehicle is involved in an accident and is rendered a total loss.
Three Options Need Consideration
There are 3 options that need to be considered when selecting the right insurance policy for you.
First is the most inexpensive and is the ACV for your vehicle at the time of the loss. For instance you purchased a brand new truck for $40,000.00 kept it 6 months and it was damaged and totaled. The insurance company will use Kelly Blue Book or NADA to determine the current cash value and that’s all you’re getting a check for regardless of what is owed or what you think it’s worth. As this is the least expensive, it is also the one with the least amount of coverage. So you may have to strip every part from the wreck that is still usable and sell it on eBay or Craigslist.
Next is agreed value. Agreed value is a figure both you and the insurance company agree upon collectively that you vehicle is worth. This figure actually starts out when you begin your policy or coverage. A figure that closely calculates the value of your vehicle at this time will be placed on your policy giving you greater coverage but at a higher monthly premium. When and if you experience a total loss regardless of the time that has elapsed between the beginning of the policy and the accident, both you and the insurance company will come to an agreement of the vehicles value that you will get paid. Agree on the value of the outstanding loan and you maybe in good shape if you paid your installments on time and kept your credit rating in place.
Lastly and the best coverage is a replacement policy. Just as the term implies you will be made whole by replacing your vehicle with a like make and model should you have a total loss. Now with this comes the highest monthly premium and the corresponding piece of mind.
Car insurance is something we all have to have to drive in the state of Florida and is there to not only protect us but others that you may cause damage to. If you’re unsure as to what type of policy you have or the coverage it provides I encourage you to take a few minutes to call your agent and have a chat, it will benefit you in the long run. Questions like, what happens to my job if I’m out of a car or can I build a savings account to offset the risks should be on your mind.