Depreciation

What Does Depreciation Mean?

Depreciation refers to the loss of value over time. In insurance, many insured items decrease in value as they age. Depending on the policy, reimbursement to the policyholder may be based on the item’s original value or its current market value, which accounts for depreciation.

Insuranceopedia Explains Depreciation

For example, cars begin to depreciate immediately after being driven off the lot following a sale. Items like cars lose value over time due to wear and tear, which diminishes their quality, and because newer models are often introduced. The drop tends to be steepest in the first few years, and how insurance companies value cars after a claim reflects that decline rather than the original sticker price. If a policy covers only the actual cash value, the insurer will factor in depreciation when determining the reimbursement amount. Because depreciation can leave that payout below what an owner still owes on a loan, drivers in that position sometimes look at standalone gap insurance to cover the difference after a total loss.