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Vehicle Depreciation and It’s Effect on Insurance Rates

Depreciation In Car Insurance

Time is the great destroyer of all. This is a well-known fact. But did you know that time can tank your car’s resale value and have a huge impact on your insurance rates? Auto insurance policies are expensive, and with the rising number of car accidents and increased labor costs, the rates are expected to rise even more. 

Let’s look at what vehicle depreciation is, and what impact it has on your auto insurance rates. Almost every car suffers from the value damages of depreciation. We’ll also look at the possible ways you can ensure that your vehicle gets the minimum impact due to depreciation.

What is Depreciation? 

Not just vehicles, but depreciation affects almost everything that has everyday use. From your laptop, mobile phones, clothes, and shoes, to your vehicle, everything that you use every day will lose its value with time. This drop in the financial value of the object is called depreciation.

Not everything experiences depreciation. For example, collectible items that are not used daily, but are kept safely to preserve their quality and prevent wear and tear increase in value over time. Some cars such as classic cars, some rare exotic cars, etc get the opposite effect with time. But depreciation can only be avoided if the object is not used every day. Sadly, that’s not the case with cars. 

Cars and Depreciation

Cars are number one on the list of “things that depreciate the most in value” because of many reasons. The rate of depreciation depends on multiple factors. Let’s take a look at some of these factors. 

Condition 

How well a car is kept and maintained is one of the most important factors in lowering its depreciation rate. If you are out in the market looking for a used car, it is logical that you’ll pay a higher price for a car that is in good condition than some broken, dented car that barely functions. 

The condition includes both aesthetic conditions such as dents, scratches, paint, polish, etc, and functional conditions such as how good the engine is, any defects, non-working parts, etc. 

Make and Model of the Car

Some specific models of cars are more in demand than others. For example, even after almost five decades after its launch, the Honda Accord is still the most preferred used car in the US. This is because of a reliable engine, great servicing structure, and other factors. 

How Fast the Industry Moves

Faster innovation and frequent updates in the automotive industry resulted in cars losing their value quickly. If better cars come out every year, the old ones will lose value very quickly. As new cars get more affordable, your vehicle will depreciate even faster.

Depreciation and Auto Insurance Rates

Vehicle depreciation affects only some of the auto insurance policies. Firstly, let’s look at the policies that are unaffected by vehicle depreciation. 

Liability Coverage

Liability insurance cannot be claimed by you and it has nothing to do with the type or value of your car. This policy can be claimed by the other driver in an accident caused by you. The coverage amount goes for the medical treatments and vehicle repairs of the other driver. This is why no matter how old your car is or what the condition it will not make any difference in liability coverage rates. 

Personal Injury Protection Plan

A personal injury protection plan is another car insurance policy that is not affected by vehicle depreciation as it solely is concerned with the cost of medical treatments for the driver, and not the repairs of the car. 

There are 12 states in the US where you need to get a personal injury protection plan along with liability coverage to legally drive a car. This policy also covers lost wages.

Policies Affected by Vehicle Depreciation

Collision Damage Waiver

A collision damage waiver covers the cost of your vehicle repairs after an accident. Any form of collision accident where your car collides with either other cars or trees/poles/other properties will be covered under this policy. It also covers damages due to bad road conditions. 

Since the insurance payout for collision coverage directly depends on the value of the car, spare parts, and other costs. As your car ages, the value goes down. This means that the premium rates for collision coverage will also go down. This is a good thing as you get to save more on insurance premiums. 

The same applies to the comprehensive policy as it covers the damages due to natural calamities, riots, vandalism, theft, etc. While the premium rates will go down, so will the actual cash value of your car. That’s not a good thing. 

Let’s say that your car gets in a very dangerous accident, making it impossible to repair. At this point, your vehicle insurance company will label it as a “total loss”. This means that the cost of repairing this car would be almost as much as the current value of the car. 

Once labeled a “total loss”, you cannot drive the car. So you’ll be compensated with the actual cash value of the car. The problem is that the insurance company decides this value, and the faster your car depreciates, the lower the insurance payout will be. The same applies to a comprehensive policy. 

To avoid spending too much on auto insurance policies for old cars and get better coverage, look for the best car insurance companies in your state. For example, if you live in Texas, then look for the most affordable Texas Auto Insurance companies and compare their coverage and prices. 

Remember that some old cars (older than 8 years) are better off without collision and comprehensive coverage. So make the right choice and select the policy that costs less and covers more.


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