What is depreciation in car insurance?

If you’ve ever purchased a brand-new vehicle, you’ve likely heard that it will lose up to 30% of its value as soon as you drive it off the lot. While the immediate drop in your car’s value might not be this drastic, a vehicle’s value does decrease as time goes on. This is known as depreciation.

What does depreciation mean in car insurance?

When we discuss an item’s depreciation, we’re looking at how much the item’s value has decreased over time – usually due to everyday wear and tear. In the context of car insurance, your new car will depreciate or decrease in value over time for a variety of reasons, such as how many kilometres you’ve driven and how well you’ve maintained it.

Depreciation affects how much you’ll be reimbursed when you make a car insurance claim. Since insurance is designed to put you back in the same position you were in just before a loss, your insurer will likely use one of two calculations to determine the amount you’ll be reimbursed for your lost or damaged vehicle:

Actual cash value: The dollar amount you’ll be paid is equal to the amount the vehicle is worth today. While this calculation may consider the original price you paid for your vehicle, it also considers depreciation and the physical condition your vehicle was in on the day of the loss.

Replacement cost: The dollar amount you’ll be paid is equal to the amount you’d need to replace your vehicle with a new, similar vehicle — no more, no less. It’s important to note that this calculation is only used if you’ve purchased a depreciation waiver endorsement.

How is depreciation calculated in car insurance?

To calculate a vehicle’s actual cash value (or the amount of money a vehicle is worth after depreciation), most insurers will research comparable vehicles on the market and will consider several factors, including:

Age. New models with updated features and technologies are hitting the market every year, which causes older vehicles to lose value as time goes on.

Kilometres. The more kilometres you drive, the less your car will be worth thanks to added stress on the engine, brakes, and other critical parts of your car.

Make and model. Certain car manufacturers have better reputations than others, and if your car’s make and model is often being recalled or is known for breaking down, it won’t hold its value compared to other trusted brands.

Fuel economy. Cars known as “gas guzzlers” often don’t fare well on the resale market, as buyers are less likely to purchase vehicles that are expensive to fuel. As a result, these vehicles may depreciate more quickly.

Wear and tear. With regular use, your vehicle will acquire dents, scratches, and other damage, all of which will take away from your vehicle’s value.

How can I protect myself against depreciation?

Many insurers will allow customers to purchase a depreciation waiver when insuring a new vehicle. If you have a depreciation waiver on your policy, you’ll typically be covered for your vehicle’s full purchase price, the manufacturer’s suggested retail price, or the cost of the same vehicle (in some provinces, like Ontario, its whichever amount is lower) if your vehicle is stolen or damaged beyond repair.

Buying a depreciation waiver will likely lead to a slight increase in your premium, but it’s important to know that without a depreciation waiver, you’ll only receive the depreciated value of your vehicle in the event of a total loss – and that might not be enough to purchase another brand-new vehicle.

 

Source: economical.com

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