Said in the simplest possible terms, a car is considered a total loss when the insurance company decides the cost to repair any damage it sustains exceeds its value. However, a great deal of nuance lies within this simple statement.
So, what makes a car a total loss?
Let's dig into the details.
The Value of the Car
One of the key variables in this equation is the value of the car at the moment of the incident. In other words, if you offered the car for sale on the open market just before the accident, what could reasonably expect the sale to have brought?
In most cases, your insurance company has a mechanism by which it makes this determination. However, you don't have to be in the dark about it. Resources such as Kelley Blue Book can help you get a good idea of the value of your car based upon its make, model and year. Mileage, condition, options and any other comparative factors, such as its color and the area in which you live, are considered as well.
The salvage value of your car is also taken into consideration — that is how much revenue it would generate if it were sold for parts, along with the value of the leftover scrap metal.
Where You Live
Different states have different rules when it comes to establishing the threshold at which a car is considered a total loss.
Many use what is known as a Total Loss Formula (TLF). This is determined by adding the cost of the repairs to the scrap value of the car. If the resulting figure equals — or is higher than — the perceived value of your car at the rime of the accident, it's declared a total loss.
If it's less, the company repairs the car.
However, other states use a lower percentage of the car's value to make that determination. For example, in Florida, Missouri and Oregon, if the cost of repair is equal to or exceeds 80 percent of the car's value, it's declared a total loss. Iowa has a 50 percent threshold, while Arkansas, Indiana, Minnesota, Mississippi and Wisconsin set the ceiling at 70 percent.
You can find the threshold for your state at CarInsurance.com.
Why This Matters
You'll probably be happy when you realize you'll get to buy a car if you're in an accident severe enough to render yours a total loss. However, you might not have the means to do so, even after the insurance company settles your claim.
You'll be on your own if you have a loan and the outstanding amount is higher than the car's value. In other words, the insurance company won't pay off your loan; it will only cover the value of the car. This means you'll either have to elect to take the cash they're willing to pay and try to get the car repaired on your own — or find a way to pay the balance of the loan out of your own pocket.
This is why it's important to understand what makes a car a total loss and how to make sure you're covered beyond what your normal car insurance will provide.
Purchasing what's known as a gap insurance policy when you get your loan or sign your lease agreement — most leases include it automatically — will protect you in this regard. As the term implies, this type of policy covers the "gap" between the value of your car and what you owe on it if it's totaled.
Making the biggest possible down payment, and electing the shortest loan term you can afford, can help you avoid this situation. Other precautions include avoiding allowing extended warranties, taxes, title fees and prior loans to be rolled into your loan.
