The difference between cash value and replacement value on vehicle insurance
Cash value is based upon the actual value of the car at the time of the repair or replacement. In order to determine this amount, car insurance companies have databases of information.
The database has information about the make and model of the car, original purchase price, average mileage and wear and tear. All of these factors determine the depreciated value of the car. This is the actual cash value of the car on which the insurance company will base any payouts.
Depreciation is something that begins the moment you drive the car off the lot. Even if you were to return the car a week later, you would find that the car has depreciated in value. Actual cash value insurance policy provisions take this into account.
Replacement value is the actual cost to purchase another similar car. Often, this amount is based on what it would cost to purchase a brand new car. For example, if you drive a car that is 2 years old and get in an accident that totals the car, if you have replacement value coverage, then you would be reimbursed to go and purchase a new car.
Unfortunately, for many drivers, the actual cash value of the car is much less than what they owe on their car. If their car is totaled, the insurance company will pay off the cash value, but the car owner will be left with the balance between the cash value and the actual car loan.
Having car insurance that provides replacement value avoids this problem. However, replacement value coverage is also more expensive.
Gap Insurance Coverage for leased cars
Gap insurance coverage is an option to make sure of full cover for the entire value of the car. Very often, auto insurance for leased cars only covers the amount of the lease and not the total value of the car. If the car is totaled, the finance company will expect the lessee to pay off the entire value of the car.
Gap insurance provides coverage for this gap between the lease value and the purchase value.