Have a Used Car? Here's Why Your Auto Insurance May Not Offer the Protection You Think It Does

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  • When your car gets totaled, your insurance company writes you a check for its market value.
  • Since used cars have gotten expensive, you may not get enough money to buy a replacement car.

It's important to have an auto insurance policy in place, whether you have a new car or a used one. And if your vehicle falls into the latter category, you may be spending less on auto insurance than someone with a new vehicle.

Now, the good news is that used cars have become more affordable than they were last year. In April, used car prices were down 6.6% on an annual basis, according to that month's Consumer Price Index.

But that doesn't mean buying a used car today is an inexpensive prospect. And so even if you have good insurance for your used car, you may be in for an unpleasant surprise if your car winds up getting totaled.

When you don't get compensated enough

When your vehicle sustains damage in an accident, your auto insurance company will often opt to pay for the cost of repairs. But if the cost of fixing your car exceeds its value, then your insurer might instead decide to write off your car as totaled. What it will then do is write you a check for the market value of your car. And you can then take that money and use it to buy a new vehicle.

The problem, though, is that the payout you receive from your auto insurance company may not be nearly enough to cover the cost of a replacement car. Let's say your used car gets totaled and your insurance company ends up writing you a check for $8,000. The average used vehicle listing price as of the end of March was $26,202, according to Cox Automotive.

Now clearly, since that's just an average, it's conceivable that you might end up finding a used car for a lot less money. The point, however, is that the payout you get from your auto insurance company may not be enough to purchase a replacement car. So it's important to be aware of that, and not take too much comfort in the fact that you have insurance.

Make sure to have savings

A totaled car could leave you in the lurch if you're forced to go out and buy a replacement vehicle today. Not only are car prices still expensive, but auto loans have gotten costly, too.

That's why it's a good idea to sock away some extra cash in your savings account. If your car gets totaled, you might be able to dip into your savings and use your cash, coupled with the payout from your insurer, to buy yourself a replacement car and avoid having to borrow for one.

In fact, let's say you get a check for $8,000 and find a suitable replacement car for $13,000. If you have $5,000 in savings, you won't have to finance that vehicle and get stuck with the higher interest rate you'd likely be looking at today.

All told, having auto insurance won't always guarantee that you'll be made whole in the event of a car accident. If your car is totaled, you may have to shell out money to replace it -- so pad your savings accordingly.

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