The term "depreciation" in auto insurance means the gradual reduction in a vehicle’s value due to factors such as age, mileage, wear and tear, condition and market demand. A new vehicle may begin losing value soon after it is purchased, and that decline may continue throughout the time it is owned.
In auto insurance, depreciation matters because it can affect how much an insurance carrier may pay after a covered claim. If a vehicle is damaged and declared a total loss, its current value may be used to calculate the claim settlement rather than its original purchase price.
How does depreciation affect a claim payout?
When a vehicle is damaged in a covered loss, the insurance carrier may calculate the payout using the vehicle’s actual cash value. Actual cash value generally reflects what the vehicle was worth immediately before the loss, accounting for depreciation.
Factors that may influence a vehicle’s actual cash value include:
- Age
- Mileage
- Make and model
- Overall condition
- Vehicle features and options
- Previous damage
- Local market prices for comparable vehicles
According to the Insurance Information Institute, collision and comprehensive coverage generally cover a vehicle’s market value, not its original purchase price. Because newer vehicles may depreciate quickly, there could be a difference between an insurance settlement and the amount a driver paid for the vehicle.
For example, a driver might purchase a vehicle for $30,000. If the vehicle is worth $22,000 when it is declared a total loss, the insurance carrier may base the settlement on the lower amount, minus the applicable deductible and subject to the policy’s terms.
Depreciation can be especially important for drivers who finance or lease their vehicles. If the remaining loan or lease balance is higher than the vehicle’s actual cash value, the driver may still be responsible for the difference.
Depreciation and actual cash value versus the replacement cost
Actual cash value and the replacement cost are two methods that may be used to determine the value of insured property. They treat depreciation differently:
- Actual cash value: The value of the vehicle immediately before the covered loss, accounting for depreciation. Many personal auto insurance policies use actual cash value when calculating a total loss settlement.
- Replacement cost: The amount needed to replace the vehicle with a new one of similar kind and quality without subtracting depreciation. Replacement cost coverage is less common in personal auto insurance, but certain carriers may offer new-car replacement coverage or a similar endorsement for qualifying vehicles.
Policy definitions, limits and eligibility requirements can vary by carrier. Drivers should review their policy documents or speak with a licensed insurance agent to understand which valuation method applies.
Drivers who finance or lease a vehicle may also want to consider Guaranteed Asset Protection (GAP) coverage. Depending on the policy terms, GAP coverage may help pay the difference between a covered total loss settlement and the remaining balance on a vehicle loan or lease. It generally does not pay for overdue payments, deductibles or other charges unless the policy specifically states otherwise.
How can drivers account for depreciation?
Drivers cannot prevent a vehicle from depreciating, but they can consider its changing value when reviewing auto insurance coverage. Checking the vehicle’s estimated market value and comparing it with the outstanding loan balance may provide a clearer picture of what could happen after a total loss.
At renewal, drivers may want to:
- Review their collision and comprehensive coverage.
- Confirm how the carrier calculates actual cash value.
- Ask whether new car replacement coverage is available.
- Consider GAP coverage for a financed or leased vehicle.
- Keep maintenance records and receipts for major upgrades.
- Review the deductible and determine how it could affect a claim settlement.
Maintaining records does not guarantee a higher settlement, but the information may help document the vehicle’s condition, equipment and improvements during the claims process.
To learn more about how vehicle value may affect a claim settlement, read about the difference between actual cash value and replacement cost in the Infinity Insurance Agency, Inc. (IIA) Knowledge Center.
Find affordable auto insurance options
Your vehicle’s value may change over time, but your auto insurance should still make sense for your needs, driving habits and budget. IIA works with more than 20 insurance carriers, giving you the opportunity to compare available coverage and flexible payment options in one place.
Shopping for insurance with a foreign driver’s license or matrícula consular? Some of the carriers IIA works with may accept alternative forms of identification, depending on the state and underwriting requirements. Our experienced Spanish-bilingual agents can explain your options and help you look for an auto insurance policy that fits your situation.
Call 1-855-478-3705 or get a free quote online today.
Get A Personal Auto Insurance Quote