Why a Totaled Car Is Almost Certain to Cost You Money Even if Insurance Pays

When a motor vehicle is damaged, auto insurance should pay for repairs. This could be a driver's own collision coverage, or the property damage liability insurance policy of another motorist who caused harm.

In some cases, though the damage done to a car is so substantial that repairing it is impossible or would cost more than the car is worth. In those circumstances, the car is declared a total loss or is "totaled."

Unfortunately, while insurers do pay for totaled cars, anyone who experiences this undesirable outcome after a covered incident is likely to face some out-of-pocket costs from their checking account -- even after getting a check from their insurer. Here's why.

An insurer's payment of fair market value often isn't enough

When an auto insurer makes a payment for a totaled car, typically the auto insurer will only pay the fair market value of the vehicle at the time of the incident minus any deductible that applies. Sadly, this is rarely enough to cover the full costs of getting a new vehicle for a few different reasons:

• Cars depreciate quickly and are unique assets. Say, for example, a driver has a five-year-old car that has been impeccably maintained in perfect condition. If the insurer pays them the fair market value, that five-year-old car may not be worth a lot. And it's very unlikely that the driver would be able to find and buy the exact same five-year-old car with a perfect maintenance record, so they may need to buy a newer (more expensive) vehicle to get the same level of reliability.
• There's a deductible that must be paid if the claim is made under the driver's own collision or comprehensive coverage. This could be anywhere from around $100 to several thousand dollars, depending on the deductible chosen.
• There are other costs associated with buying a new car, including sales tax, a vehicle registration fee, and document fees. This means that a driver who gets paid the fair market value of their vehicle can't just swap out that car with a similar one at the same cost. They'll have to cover all of these purchasing costs.

Often, drivers end up being out several thousand dollars because they can't get the equivalent car and they have all of these additional fees and their deductible to pay.

How to cope with a totaled car

When a car is totaled, drivers need to understand their rights. It is sometimes possible to negotiate with an insurer to pay more money than the first offer they make. Those whose car is totaled should do the research on what vehicles of the same make, model, and year are selling for and can make a counter offer to an insurer if they aren't offered enough.

It's also a good idea to have gap insurance on any vehicle for which there is a car loan, as otherwise a motorist with a totaled car could be left paying out of pocket to the lender if the insurer doesn't provide enough money to pay off the loan balance in full.

Say, for example, you have a 4-year-old car with a remaining car loan balance of $16,000. Now imagine you total that car in an accident and your insurer determines that the car is only worth $13,500, and they write a check for that amount. Unfortunately, without gap insurance, you would be on the hook for repaying your auto loan provider the additional $2,500 out of your own pocket to pay off the loan before you even begin shopping for a new car. This would make having a totaled car significantly more expensive.

Finally, motorists should always have an emergency fund with several months of living expenses saved. This emergency fund can be tapped to cover the costs that are incurred if a car is totaled, so the driver can get back on the road.