Vehicle depreciation and your auto insurance
Depreciation is an accounting concept, and represents the reduction in value over an object’s lifespan. In other words, the older it is the less it’s worth, and depreciation is the name of the loss in value. For new cars, you have probably heard the old saying that they are worth a lot less as soon as you drive it off the dealer’s lot, and that is due to depreciation.
The newer it is, the higher the depreciation
A rusty, old car that’s 30 years old isn’t going to change much in value when it turns 31 or 32 years old. However a new car that’s fresh from the dealer will lose a lot of its value when it turns 1 or 2 years old, due to higher depreciation in the first few years. In fact, a new vehicle can lose up to 20-30% of its value in the first year (Source: https://www.nerdwallet.com/blog/insurance/car-insurance-basics/car-depreciation/#:~:text=Your%20car%27s%20value%20decreases%20around,more%20of%20their%20initial%20value.). Some cars depreciate quicker, and some depreciate slower, but as a rule of thumb a car can lose 60% of its value within the first 5 years.
Depreciation affects repairs
When making a claim for a repair, insurers will cover you up to the Actual Cash Value which includes a deduction of depreciation. It may not be much for a small repair but for larger repairs that depreciation amount can add up, so you may find yourself making up a big difference out of pocket.
How much do you owe?
If you’ve made a minimum deposit or no deposit to buy the car, and/or are paying a high interest rate, your loan could end up being worth more than the car itself due to depreciation. This is also known as an Upside Down Loan, where the rate of depreciation has exceeded the speed you’re paying back the loan so you end up owing more than the car is worth. What this means to your insurance is that if your car is involved in a total loss, the insurance company would pay you an amount that is less than what you still owe to the bank. So even if you give every penny of the insurance claim money to the bank, you still have to pay an additional amount out of pocket for the car you no longer have.
Protection for newer cars
In addition to having full coverage, which we discussed in our previous Resource Centre article https://sukhuinsurance.ca/resource-centre/full-coverage-on-your-auto-insurance/, new car purchasers can add on a coverage to remove depreciation. This coverage is available to new car owners only, and lasts 2 years from the date of purchase (some carriers cover up to 4 years), and waives the insurance company’s deduction of depreciation on claims. As you can imagine, depreciation is most significant on new car purchases so your broker would normally add on this coverage for you when you buy a new car, as part of their best practices in looking out for your interests.