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UPDATED: Mar 13, 2020
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Car insurance is certainly a sound investment and nobody wants to lose money on their vehicle in the event of a car accident. However many drivers do as they never had the right type of car insurance in place to cover the full cost of a replacement vehicle. By default car insurance companies appraise vehicles according to their book value and this book value can sometimes be much lower than the balance of your car loan or a suitable replacement vehicle.
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A lot of people get upset when car insurance companies cut checks according to book value however there are many options to purchase additional coverage and you should never blame an insurance company for selling you coverage in a marketplace where hundreds of options exist. You never read your policy so its time to learn about book value and what you can do to insure full coverage in a car accident.
What is the Book Value of a Car?
The book value of a car is the value of a vehicle based on current market prices for the same make and model with comparable wear and options. For new car owners the book value is often far less than your car loan balance as it accounts for depreciation which can be up to 20% or in the first year of ownership alone. Even owners of older models can be surprised at the book value of a vehicle since cars are some of the worst investments around when it comes to maintaining value. Car insurance companies use both external and propriety tools to determine book value however the most well-known resource to consumers is the Kelly Blue Book value.
Who is Kelly Blue Book?
Kelly Blue Book is the company who created the word “Blue Book” which has become so common in the automobile world. Founded in 1926 Kelly Blue Book offers an independent vehicle valuation service to help car insurance companies, consumers and dealerships value vehicles. While not a perfect science Kelly Blue Book values are still some of the most referenced values in the world when it comes to how much a vehicle is worth. The company factors in a large number of factors including regional popularity, mileage, optional features, a vehicle’s condition and more. Results are typically provided in ranges under 3 categories:
- Trade-In Value
- Retail Value
- Private Party Value
When car insurance companies look at the book value of car you can bet many of the same variables are used and Kelly Blue Book values are very similar to the amount a car insurance company is proposing to pay you.
Is the book value of a car the same as replacement value?
Sometimes the book value of a car is the same as replacement value however unless you have a “full replacement coverage” option in your car insurance policy there is no guarantee the check will be large enough to buy a comparable car. Never confuse the words book value for replacement value – always buy car insurance coverage that promises to pay enough for a replacement value otherwise you could be downgrading after a car accident.
Should I be concerned about book value if I own a new car?
New car owners are the biggest losers when having a vehicle insured simply for book value. In the early years of any vehicle depreciation is often its greatest so if you opt to finance a vehicle and have an accident in the early years of ownership it’s very possible to only have enough insurance to cover a portion of your auto loan’s principal balance. Car insurance companies and auto loan companies do not work together to make sure you are fully covered, each have different objectives. One is to provide auto loan financing and the other to provide insurance. If you get in a total loss accident and only get a check for $17,000 but owe $25,000 the car loan company is not going to say “don’t worry about it”. They want the rest of their car loan balance and will even hire collection agencies to get it.
However car insurance companies do have several options to help bridge this gap with Guaranteed Auto Protection – GAP Insurance. Although an additional premium the cost of GAP insurance is often less than $20 a month and should you ever get in an accident where your car is totaled then this supplemental insurance will kick in and pay off the rest of your car loan leaving you only to worry about which new car to buy.
Auto loan companies and leasing companies also offer forms of GAP insurance. Some are included in the monthly loan payments while others offer GAP insurance through an affiliated company. However you do it always make sure you have full protection for the vehicle’s value and your financial liability to any auto loan or leasing company in a car accident.
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