How Car Insurance Companies Determine Salvage Value

How car insurance companies determine salvage value for vehicles depends on quite a few factors. A salvage value for your car may be determined through software and databases that establish the street value of the car and compare it against the loss and damage ratio.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Written by Laura Berry
Former Insurance Agent Laura Berry

Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP® Joel Ohman

UPDATED: May 21, 2022

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Here's what you need to know...

  • Car insurance companies determine the value of salvage cars through a variety of methods involving many steps
  • Every car insurance company must follow the state-mandated rules for total loss vehicles
  • Any car insurance company will want to make sure that an unsafe vehicle is removed from the highway

It’s never a good day when you get into a major accident that leaves you with a totaled vehicle. Even a minor fender bender could leave you with a damaged vehicle that can turn into one of many junk cars out there. However, that doesn’t always mean the end of the car’s life.

Sometimes there is the possibility that the vehicle can get totaled out and then sold at a salvage price for a car. Most companies use a car salvage value calculator to make an offer base on the salvage value of a car. The car insurer has to calculate the salvage car value and you can sometimes get your car back by turning around and buying the car back from your insurer.

Let’s take a closer look at how car insurance companies determine salvage value, how to buy back salvage cars, and more. Take a moment to request free auto policy quotes, in order to help you find good quality service at affordable salvage prices of cars.

When is a car’s salvage value determined?

If your car’s damage would cost too much to repair due to collision damages or mechanical issues, your insurer may total it out. For example, if a damaged car has a cost of repair that is around $8,000 and a trade-in value of about $3,500, the claims adjuster will declare a total loss based on the salvage car prices.

The insurance adjuster will most likely take other factors into consideration when declaring the actual cash value (ACV) of the car, including the condition of the interior and the market in which the insured lives.

What is the best way to get the value of your salvage car?

The car insurer may also use other factors in determining the value of a damaged car, including third-party vendor databases. The insurer’s proprietary software system helps the adjuster to calculate the cost of repairs in the local market, including parts and labor. Sometimes, insured drivers believe these information systems don’t provide an accurate projection of costs.

Even if the car can be repaired, and the owner wants to repair the car, most state laws require the car insurer to declare the car a total loss.

If the policy deductible is $1,000 in this example, the insured receives a replacement cash check for just $2,500, rather than the $3,500 it is valued for. The calculation for your settlement check assumes the car’s actual cash value (the trade-in by market) less the deductible. In this example, the insured maintained a higher-than-average deductible policy and probably saved money on their car insurance rates.

So, we’ve looked at the salvage value of a car and what it means. What if you go to trade in your car and you don’t get as much as you expected?

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How does vehicle salvage value compare to depreciated value?

Keep in mind that the car’s repaired trade-in value and the value of a salvage vehicle differ. You will never be able to get as much for your car as the original cost. According to the IRS, if the car has a five-year life, and is purchased at $30,000, then the straight-line depreciation method reduces the car’s value by about $5,000 per usage year.

According to this method, the car’s salvage value for accounting purposes is about $5,000 at the end of its useful life. In reality, the salvage value is realized by the sum total of its parts. Depending upon the condition of the car’s inner operating parts and body, the owner may realize more or less than its depreciated and anticipated salvage value.

A car insurer usually requires the insured to sign over the car’s title in the event of a total loss.

When would you sign your car title over to the insurance company?

The insurer, not the insured, will often decide to sell the car for “junk” and use the services of a salvage yard to dispose of the car. The salvage company decides what parts may be resold, and these parts are then removed from the car. When the car is stripped of parts and frame, the salvage company sells the car’s shell to scrap yards. What’s left of the car is crushed, melted down, and ultimately recycled at scrap prices.

If the salvage company doesn’t decide to strip the car, the car may be provided with a salvage title by the state Department of Motor Vehicles. A salvage title indicates the car isn’t in present drivable condition. If the company decides to sell the car to a repair shop or at auction values, the ultimate buyer may decide to bring the car into drivable condition.

At that time, the car is inspected to determine its drivability and safety. In some states, the salvage title is changed to that of prior salvage, a rebuilt car title, or a similar sounding title name. When the car is resold, a new driver may learn that the car was once a salvage vehicle.

How does a driver buy back a car the insurance company sells at salvage value?

Many drivers mourn a favorite car after the insurer declares a total loss. The insured usually signs over the car title to the insurer. After the insurer disposes of the car, the former owner may seek to repurchase it. The driver may believe they can repair the car at a lower cost than the vehicle claims adjuster’s calculations. Or they may not care about spending the extra money to recover their car.

Depending upon the state in which the driver lives, they may be able to repurchase the car.

State law determines the buy-back age requirement if there is one, or specifics about the car’s drivability. If the state allows the driver to repurchase the car, they may need to have the car retitled from drivable to salvage condition. When the car is repaired, the owner may then retitle the car as a “rebuilt” vehicle.

Each state maintains different laws about when and if the former owner may repurchase a salvage title vehicle. Consult with your financial advisor or attorney about the laws in your state.

How To Properly Insure Your Car

You can get an auto policy for your vehicle, whether it’s brand new or a salvaged vehicle.

Sometimes, you may only be able to get liability coverage on a rebuilt car, due to how the structural integrity of the vehicle may have been altered in a collision. But you can still get coverage for either a clean title car or a salvage title vehicle.

To find out what is the salvage value of your car, you should contact your auto insurance company and ask for the percentage of market value that it uses for determining salvage value.

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