Car Depreciation and How Does It Affect Car Insurance Rates?

What Is Depreciation in Car Insurance?

Car depreciation represents how much of a vehicle’s value you’ve used over time. It varies greatly depending on make, model and brand. Generally the value of a new car can drop by more than 20% after the first 12 months of ownership. You can use a car depreciation calculator to calculate your car value.

How Does It Affect Car Insurance Rates?

Some car insurance coverages like collision and comprehensive insurance are directly correlated with the value of your car. For example, the insurance rates for a $30,000 brand new car would be considerably different than a depreciated car valued at $15,000. Note that insurance companies are not proactive to alert you that your insurance rates should possibly be reduced due to depreciation. You have to request a rate review every few years to account for depreciation.

However, keep in mind that many add-on coverages like personal injury insurance(PIP) are not related with the value of your car. So their premiums are not affected by depreciation.

If you’re adamant about keeping the same value for your new car over time, you can add replacement insurance coverage to your insurance policy. This coverage will help you offset any depreciation that your car might experience, and guarantee that your car gets replaced with a brand new one if it is in an accident.

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About Dale Williams

Dale Q. Williams, MBA, is a well-respected financial executive whose experience spans from insurance to investment banking. Dale has first hand underwriting experience through working for one of the largest U.S. based insurance carriers, and advisory experience from working for several bulge-bracket and middle-market investment banks. Dale also received his MBA from University of Chicago Booth School of Business, with concentrations in finance and accounting.