Can You Insure a Car for More Than It’s Worth?

Understanding Car Insurance Value

What Determines a Car's Insured Value?

There are two ways to determine your vehicle's insured value, actual cash value and replacement cost.

Actual cash value (ACV) is the cost of repairing or replacing property at the time of loss with like kind and quality minus depreciation. An insurance company estimates ACV based on the cost to repair or replace your vehicle before it was damaged, minus depreciation.

Replacement cost is the amount needed to repair your vehicle with a similar type and quality of materials or replace your vehicle for the full value of a comparable one.

As a result, ACV coverage is usually less expensive than replacement cost.

Can You Insure a Car for More Than Its Worth?

No. Car insurance is intended to provide financial protection against unexpected events that could otherwise result in significant out-of-pocket expenses. If drivers could insure a car for more than its value, they might be incentivized to commit fraud (e.g., staging a theft or accident to collect a payout).

What Happens if Your Car is Totaled Before You Pay It Off?

Once you’ve filed a claim and your vehicle is declared a total loss, your auto loan will need to be paid in full. Some borrowers may find themselves owing more than their vehicle is worth, known as an “upside down” or negative equity loan balance. Financial institutions may require borrowers to have gap insurance on their auto insurance policy to prevent this from occurring. This endorsement will pay for some or all of the difference between a loan or lease balance on a vehicle and what the insurance company pays if the car is considered a total loss.

Conclusion

Annually reviewing your auto insurance policy ensures you have the appropriate coverage for your vehicle based on its age and condition.