How it works
When your car is totaled or stolen, the insurer does not pay what you paid for it or what a new one would cost. It pays what the car was worth just before the loss, after depreciation, minus your deductible.
Example: a new version of your car would cost $35,000, and age and wear have reduced your car's value by $15,000. Its actual cash value is about $20,000, and that is roughly what a total loss claim would be based on.
Cars lose value quickly at first: the Insurance Information Institute says most cars lose about 20% of their value within the first year, while loan balances shrink more slowly. That is why a driver can owe more on a loan than the car is worth, a shortfall that gap insurance is designed to cover. Some coverages for collector cars avoid depreciation by setting an agreed value in advance.
Related terms
Sources
- Texas Department of Insurance, Auto insurance guide depreciation defined; actual cash value as replacement cost minus depreciation
- NAIC, Glossary of Insurance Terms actual cash value and replacement cost
- Insurance Information Institute, What is gap insurance? as of October 28, 2026
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