Trying to "work" the system to avoid paying the $500 deductible is a huge risk on your part. Likewise on "cashing out". Getting hit is not supposed to be a for-profit venture.
Plus, when you signed your loan documents, you promised in writing to keep the car in shape, so not fixing the car would be dishonest. They hold the title because the car belongs to them, not you. They're just letting you drive it until you've paid it off. Fix their car.
And I'm not saying that you won't, but I've never seen someone "forward the money to the lein holder". What I've seen is plenty of people "cash out" so that they can piss away the money on other stuff.
Typically, the initial estimate is just for what they can see. Once the car is torn down, there will be a supplemental claim to cover the rest. If you cash out, trying to save the $500 deductible, you may screw yourself out of thousands of dollars.