What is depreciation in car insurance and how to protect against it

One key aspect people should keep in mind when buying a new car is how much it will depreciate once it leaves the lot. Why is this important? Depreciation is a factor car insurers take into consideration when setting up your policy. What exactly is depreciation in car insurance and how can you protect against it? Have a look below to learn more!

Car depreciation: what does it mean in car insurance?

What is car depreciation? Ecomonical.com defines it as, “how much value it [the car] has decreased over time - usually due to everyday wear and tear.” Where car insurance in concerned, a new car will lose its value because of the amount of kilometres it has been driven and how well it has been maintained.

The amount of depreciation can also affect the value of your vehicle should you be reimbursed after making a car insurance claim. Insurers use actual cash value or replacement value calculations to figure out the value of your damaged car:

Actual cash value is the dollar amount you will be given equally to the amount your car is worth today. This calculation takes into consideration the original price you paid for your car, as well as the loss of value and its physical condition on the day it was damaged.

Replacement value looks at the dollar amount you will be given that would be equal to how much you would need to replace your vehicle with a new or similar car. This calculation would only be used if you purchased a depreciation waiver endorsement.

What is used to calculate depreciation in car insurance?

Insurers use a few factors to calculate the actual cash value of a vehicle. Most will look at comparable cars on the market and take into consideration the following to make their decision:

• Age – with feature advancements being made to new car models every year, this causes older models to lose their value.
• Make and model – The value of a vehicle is often judged on its manufacturer, as some brands have a better reputation than others. As well, if recalls are often being made on your car’s make and model, then its value will decrease.
• Kilometres – Stress to the engine, brakes, and other key parts to your car increase with the number of kilometres, lowering its value.
• Fuel Economy – vehicles that use a lot of fuel do not do as well in the resale market than those designed to be more fuel-efficient. This depreciates a vehicle’s value.
• Wear and tear – scratches, dents and other damage to a car can occur with regular use, reducing what it is worth.

Is there a way to protect yourself against depreciation?

A depreciation waiver is good to have as a part of your policy to help protect yourself against the loss of value of your car. You are able to purchase one when insuring a new vehicle. With this little “golden ticket” in your pocket, you will typically be covered for the full purchase price of your car, the manufacturer’s suggested retail price, or the cost of the same car (in certain provinces, like Ontario, you will receive whichever amount is lower) if you experience a loss due to theft or irrevocable damage.

Note that, the waiver of depreciation endorsement is only available on newer vehicles, vehicles that are first-time owned and typically less than 500 km on the odometer. The months' coverage provided and kilometer base may vary amongst insurance providers.

A slight increase to your premium will likely occur if you buy a depreciation waiver. Without it, you will only be awarded the depreciated value of your car should a total loss occur. Having this added feature on your policy makes it easier for you to possibly buy another brand-new car.

Are you thinking about getting insurance for a new vehicle? Be sure to ask a licensed car insurance broker to see if you qualify for a depreciation waiver. 

Resources

https://www.economical.com/en/blog/economical-blog/march-2021/what-is-depreciation?
https://www.canadianunderwriter.ca/features/a-total-loss (depreciation waiver endorsement)
https://www.canadadrives.ca/blog/car-guide/tips-to-beat-car-depreciation
https://www.economical.com/en/blog/economical-blog/february-2018/5-common-car-insurance-endorsements