Could cheaper cars mean lower premiums?

Althea Chang

Entry-level cars are getting cheaper. And that could mean that car insurers will be more likely to declare them a total loss -- because it would cost less to simply pay owners for their value than it would be to repair them. If insurers total more cars, that could affect how much you pay for your car insurance.

If a car's price is already low, depreciation will cut its value even more as soon as it's driven off a lot. So, the likelihood of a car sustaining damage that's worth more than the car itself increases, says Greg Horn, a vice president at research firm Mitchell International. In other words, insurers might end up totaling more cars than they repair.

But whether car insurance premiums will increase or decrease as a result of more cars being declared total losses remains unclear.

"The frequency of claims is increasing, as are the costs of repairing a vehicle and adjusting claims, so insurers will have no choice but to pass on those increases to the consumer," Horn says.

On the flip side, automakers continuously are improving car safety, making accidents less likely to happen and saving money for car insurance companies as a result. That could translate into lower car insurance rates.

What is a total loss?

The decision of whether to make repairs or declare a vehicle a total loss is based on the actual cash value of your car. And the actual cash value is based on a variety of factors, including what kind of car you have, how old it is, what kind of damage was done, depreciation, mileage, the insurance laws in your state and any damage that was done before the accident, according to Allstate's and GEICO's websites.

If the cost of repairs exceeds the car's actual cash value, the insurer will cut you a check for the car's actual cash value. But because the actual cash value of your car takes depreciation into account, you probably won't be able to buy a brand-new car to replace your totaled one. Moreover, if you're dealing with collision or comprehensive coverage, your deductible will be subtracted from your check. For example, if your car's actual cash value is $5,000 and you have a $1,000 deductible, you'll end up with $4,000.

Will more total losses raise my premium?

Even though the number of total-loss claims may be on the rise, that doesn't mean that insurers will be spending more money -- and passing the costs on to policyholders. In fact, according to Edmunds.com, given the expenses of fixing a car and providing a rental car in the meantime, it might be easier for insurers to write a check for the car's actual cash value.

Some car insurance companies consider a vehicle a total loss when the cost to repair it exceeds just 51 percent of the vehicle's actual cash value, according to Edmunds. Others wait until the repair bill hits the 80 percent mark.

Vehicles have gotten much safer in the past few decades, reducing the frequency of accidents and total losses in the first place -- and saving insurers even more money.

Technology like forward collision sensors, electronic stability control and automatic braking, plus simpler advances like the seat belt, have led to safer driving, according to the Insurance Institute for Highway Safety.

Even on low-cost vehicles, air bags now are standard, says Dykema Gossett attorney Terri Reiskin, who has worked with the automotive industry. Yet things like seat belts and air bags only reduce injuries in the event of a crash. It's the technology that prevents accidents, such as antilock brakes and electronic stability control, that will save drivers and insurers the most money, according to Reiskin.

"Now, some cars have the next generation (in technology), including 'intelligent' systems that actually apply the brakes when sensors detect an impending collision," Reiskin says.

The car's price and safety features aren't the only factors affecting premiums, however. Car insurance premiums can vary, depending on the likelihood of theft, your driving record and your age, according to the Insurance Information Institute.

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