Straight Line Rule
What Does Straight Line Rule Mean?
The straight-line method is a simple approach to calculating the depreciation of an asset, reflecting how much value it loses each year. To determine depreciation, subtract the asset’s salvage value from its purchase cost and divide the result by the asset’s useful life in years.
This method is also referred to as straight-line depreciation or straight-line amortization.
Insuranceopedia Explains Straight Line Rule
For example, if you purchase a car for $20,000 with a salvage value of $5,000 and a useful life of 10 years, the straight-line method calculates depreciation as $15,000 divided by 10, or $1,500 per year. This is one of the simplest ways to determine depreciation. It also helps explain what happens if your car is totaled, since insurers usually base the payout on the depreciated value at the time of the loss rather than the original purchase price.
This method can also help estimate the amount you might receive after a loss if you have a property insurance policy that only reimburses the fair market value at the time of the damage, rather than covering the cost of a brand-new replacement. Drivers who still owe money on a financed vehicle often find the depreciated payout falls short of their loan balance, which is why GAP insurance exists to cover the difference.
