Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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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. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 19, 2021

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Insurance Q&A: “How is my car considered a total loss?”

We’ve all heard the phrase, “My car got totaled.”  It typically comes up when someone is explaining extreme damage to their car as the result of an equally horrific accident.

We get it it, it was bad, but what does that mean from an insurance company perspective?  And what can we expect in terms of compensation?

Total Loss? It’s a Simple Formula…

Insurance companies use a simple formula when determining if your vehicle is a “total loss,” or “totaled” as it were.

If the damage to your vehicle costs more to repair than it would cost to write you a check to cover the value, it’s “totaled.”

The good news is that you’ll be compensated from the insurance company, instead of being stuck with a badly damaged car that though repaired, will lose resale value and may wind up a lemon.

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Here’s how the process works:

First, the insurance company will determine if your policy includes physical damage coverage assuming the accident was your fault.

If you are not at fault, the other driver will need to be insured with high enough liability limits to pay for the value of your car.

If they do not carry adequate liability limits, you better hope you have either uninsured motorist and/or underinsured motorist coverage.

If the at fault party, either you or the other driver, does not have adequate insurance, the victim is out of luck.

The only hope of recouping losses resulting from the damages would be to sue the other driver.

Good luck getting money from a driver who wasn’t responsible enough to carry insurance in the first place!

Of course, in theory, it’s very easy to complete the process once coverage is verified for the at fault driver.

Let’s look at an example of a total loss:

Value of vehicle: $4,000
Cost to repair: $5,000

(Assumes insurance coverage was in force at the time of the accident)

A vehicle worth $4,000 collides with a tree while swerving to avoid a deer.  Yes, it happens, a lot.

The insurance company gets damage estimates of $5,000 to repair the car.

The insurer would be crazy to pay more than it’s worth in repair bills, so they will consider it a “total loss.”

The insurer will also hold onto your old car once they replace it and probably sell it for scrap to recover some of the money they paid to buy you a new one.