November 18, 2009

Adjusting Auto Insurance Coverage For Vehicle Depreciation

As most people are aware, many factors go into determining what a auto insurance company charges you for your auto insurance policy. And, every time you reevaluate your auto insurance coverage – which should be done about once a year – each of these factors is changing. One that changes with every mile you drive is your car. Your car continues to depreciate every time you get on the road. This will ultimately affect your auto insurance.

Vehicle depreciation is the market value decline of the vehicle in dollar amounts. There are a number of ways an auto insurance company goes about determining the depreciation of your car. This not only done to adjust your auto insurance rate, but also so they know the value of your car in case an accident causes them to have to ‘total’ out your vehicle. The first method is the straight line method. According to, this method is defined as ‘ calculated by taking the purchase or acquisition price of an asset subtracted by the salvage value divided by the total productive years the asset can be reasonably expected to benefit the driver.’ So, if you bought a $20,000 car and figured all the parts would be worth $10,000, you’d divide that by the number of years you thought it would be useful to get the value. The accelerated depreciation method takes into consideration that as the years go by, the performance of the vehicle diminishes, and therefore the value does as well. This equation will take more into account how old the vehicle is, as opposed to focusing primarily on the monetary value.

One way to protect yourself against the effects of depreciation is to purchase a vehicle that has a high estimated resell value. If you can purchase a vehicle that will hold it’s value longer, depreciation will be less of a worry. In addition, you can also purchase gap auto insurance when you purchase a new vehicle. When you purchase a new car, you take out a loan to cover the amount it cost. Unfortunately, the minute you drive off the lot, that car is worth significantly less than you paid for it. So, if you get in an accident, your auto insurance will pay you the value of the car – which will ultimately be too little for you to pay off the loan. Gap auto insurance will pay off the remainder of the loan after the initial payout, preventing you from having to pay off a loan for a car you can no longer drive.

Car depreciation is an unfortunate reality. Discuss with your auto insurance agent how you can prevent this from effecting your auto insurance rate.