How do insurance companies value your car?

Wonder how insurance companies determine the value of your car? This guide tells all.

Car insurance gives you financial protection from accidents, theft, and other risks. A key factor in your annual insurance premium is your car’s value. This guide explains how insurers determine that value and what factors impact it.

What valuation methods are used by insurance companies?

Insurance companies use various valuation methods to assess your car’s worth, and each method can impact your premium and coverage.

Here are the most common valuation methods used by insurers to help you better understand how your car’s value is calculated:

Market value

This determines a car’s worth based on its current selling price. Insurance companies use this method to estimate what the car would sell for today. It’s commonly applied to standard policies for newer or well-maintained cars with stable values, and is best for everyday cars that aren’t rare or heavily modified.

Agreed value

This sets a fixed payout amount between the insurer and you, the policyholder, at the start of the policy. In the event of a total loss, the insurer pays this agreed value, regardless of market value or depreciation. It’s ideal for classic, modified, or high-value cars where you’ve made significant investments, ensuring you’re fairly compensated for the car’s true worth.

Trade-in value

The trade-in value method estimates a car’s worth based on what a dealership would offer during a trade-in, typically lower than market value due to resale costs and profit worth considering if your car is in average condition or has a common market value, and you want a straightforward trade-in.

Retail value

This method estimates a car’s worth based on the price it would sell for at a dealership, typically higher than market or trade-in value. It’s used when buying from a dealership or for insurance claims such as replacement car claims, and is best for cars in good condition or sold at retail price.

Specialist value

This determines a car’s worth based on its unique features, rarity, or collectability, often with expert assessments. This value is higher than market or trade-in value and applies to rare, classic, or highly modified cars. It’s typically used for vehicles with niche appeal, such as in classic car insurance or for cars with significant modifications.

What factors influence car valuation?

Here are some factors that influence car valuation:

Make and model

Supply and demand affect car prices: higher demand means higher prices. A manufacturer’s reputation also plays a role, with cars from reliable brands typically selling for more.

Age

Deprecation rates can vary across different manufacturers and models, but it’s a given that your car will lose value over time.

Mileage and usage

A vehicle with lower mileage generally has a higher value, as less use means less wear and tear. The type of usage (personal or commercial) also impacts its value.

Condition

A well-maintained car with a clean history usually has a higher valuation, whereas a car that has been involved in accidents will almost always be valued at a lower price.

Location

The location of the car significantly impacts valuation and premiums as insurance companies assess risk factors such as crime rates, theft, and weather conditions specific to your area.

Ownership history

The number of previous owners affects a car’s value, with fewer owners typically preferred by buyers.

Accident history

An accident reduces a car’s resale value, depending on damage severity, the insurance write-off category, and repair quality. Poor repairs can harm reliability, and an accident may also raise insurance costs, deterring buyers.

What happens if the car is written off?

If your car is written off and you make a claim, your insurer will typically pay out the current marker value of your car, rather than the amount you listed on your policy. This is due to depreciation – the payout reflects what your car would be worth if sold today, based on its age, mileage, and condition at the time it was written off or stolen.

However, certain types of insurance policies may pay out more than the current value of your car. This includes:

GAP insurance

If your car is stolen or written off, GAP insurance can cover the difference between what your car is worth now and what you paid for it. It’s an extra insurance policy, usually added alongside a standard car insurance plan, that helps top up your payout so you can buy a new car.

GAP insurance is optional, but it’s worth considering if you’ve recently bought a car on finance, as you might owe more than the car’s worth if it’s written off.

Agreed value policy

With this, you and your insurer agree on a set payout amount at the start of the policy in case of a total loss. You may need to prove that your car is worth more than its market value, often with an independent valuation.

Agreed value policies are typically used for classic or modified cars, as they help protect the additional investment and modifications made to the vehicle.

How insurance companies value a car FAQs

Do insurance companies undervalue cars?

Insurance companies may undervalue cars, especially when using the market value method, as they base the payout on the car’s current value, taking depreciation into account. This means you might get a lower payout than what you originally paid for the car or what it might cost to replace it. However, policies like agreed value insurance can help avoid this issue.

Do car insurance companies pay out for the market value?

Yes, car insurance companies usually pay out based on the car’s market value at the time of the incident such as a write-off or theft, rather than the original purchase price, which takes depreciation into account.

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