Auto Insurance Depreciation - What Does It Mean?
The concept of depreciation is pretty straightforward – most things, with time, decrease in their value. This is something that is perhaps most prevalent with cars; in fact, it could be argued that the second-hand auto industry is entirely reliant on depreciation in order to provide more affordable vehicles to those operating under stricter budgets.
However, did you know that auto insurance depreciates as well?
In auto insurance, depreciation refers to how much you will be reimbursed in the event of a claim – and this is typically calculated using the following two metrics: actual cash value and replacement cost.
The actual cash value calculation aims to determine how much the car is worth in the present. Though it takes into account how much was initially paid for the car, it puts much more emphasis on how much the car could be realistically sold for in that moment.
The second method, replacement cost, aims to reimburse you to the exact amount it would cost to purchase a new, similar vehicle. It should be noted, though, that this calculation method may only be used if you have purchased a depreciation waiver endorsement.
How, then, do insurance companies determine what the reimbursement dollar amounts should be?
Typically, there are five categories that are analysed: age, kilometres, make & model, fuel economy, and wear & tear.
Age, kilometres, and wear & tear all go hand-in-hand – the older the car is, the more likely it will have greater wear & tear due to increased mileage. The fuel economy and make & model are also important, though, as cars with poor reliability reputations and a tendency to guzzle gas are much harder to move on in the second-hand market and, therefore, claim reimbursements will reflect that.
So how can you make sure you are protected from depreciation?
This is where the aforementioned depreciation waiver endorsement comes in. A depreciation waiver endorsement ensures that, in exchange for a slightly increased premium, you will be covered either for your vehicle’s full purchase price, the manufacturer’s suggested retail price, or the cost of the same vehicle (in the event that it is stolen or totaled)
Though many look at the initial increase in premium and are dissuaded, data suggests that depreciation waiver endorsements pay for themselves in the long run. Especially in the world of today where advancements come thick and fast, depreciation has never been a more prevalent problem.
To check if you qualify for a depreciation waiver endorsement, call us today at 905-696-9090 or