After a serious accident, you may have a number of questions about your automobile insurance. If the company declares the car a total loss, for example, you may wonder what you can do with the insurance payout. Your options for spending these funds will vary depending on your individual situation.
TL;DR (Too Long; Didn't Read)
Depending on the amount of the totaled insurance check, you may or may not be able to purchase a new car.
Determining the Loss
After an accident, insurance companies employ a number of formulas to determine whether they should repair your car or declare it a total loss. Those calculations are based on the fair market value of the vehicle before the accident. It can vary from state to state but generally, a vehicle is considered totaled if the cost to repair exceeds between 65 and 80 percent of the car's total value.
In the insurance company’s eyes, it is less expensive to simply pay for the car than to repair it. Once the insurance company declares the vehicle a total loss, a company representative will present a check for the value of the car; in return, the company takes ownership of the vehicle. In many cases, it sells the vehicle to a junkyard.
Handling Financed Vehicles
If you are making payments on your vehicle, or if it is leased, you may never see the insurance company’s check. Depending on the specific terms of your financing agreement and your insurance policy, the insurance company may make the check out to the financial institution that financed your vehicle and holds the deed. If the amount of the check exceeds the amount you owe, either the insurance company or the financier will forward you the remainder.
Vehicles That Are Paid in Full
If your vehicle is not financed, you will likely receive a settlement check from the insurance company. Once you receive this check, you may spend it any way you wish. Many drivers choose to use these funds to purchase another vehicle, though some prefer to invest the money or save it for future use. Depending on the value of your totaled car, you may receive a payout large enough to pay for a new car. If you receive a smaller check, though, you may use the funds as a down payment on a new car or as payment for a less expensive used vehicle.
Additional Things to Consider
In order to receive a payout when the insurance company declares your vehicle a total loss, you must typically carry comprehensive coverage. If you choose to keep your car, the insurance company will typically deduct the salvage value of your car from the payment it issues.
If the remaining payout is substantial enough, you may choose to use these funds to repair your vehicle yourself, purchase a used car, make a down payment or even buy a new vehicle. In most states, your car will be required to be listed as a "salvage title," which means you may not be able to renew your registration until you complete the repairs.
Keith Evans has been writing professionally since 1994 and now works from his office outside of Orlando. He has written for various print and online publications and wrote the book, "Appearances: The Art of Class." Evans holds a Bachelor of Arts in organizational communication from Rollins College and is pursuing a Master of Business Administration in strategic leadership from Andrew Jackson University.