Depreciation Insurance

What Does Depreciation Insurance Mean?

Depreciation insurance, also known as zero depreciation coverage, is a provision in a property insurance policy that covers the actual cash value of the property before any loss in value due to depreciation over time. This type of coverage disregards the decreased value of the property resulting from factors such as market depreciation, damage, or wear and tear.

Insuranceopedia Explains Depreciation Insurance

Most properties lose value over time; for example, a used car is not as valuable as a new one, and real estate prices can decline, reducing a property’s worth.

With a policy that includes depreciation coverage, there is no deduction for these factors, meaning the policy will pay out an amount equal to what the insured originally paid to purchase the property.

For vehicles specifically, this distinction matters because standard auto policies only pay the car’s current market value after a total loss. If the owner still has a loan balance higher than that amount, they are responsible for the difference. That is the exact problem GAP insurance is designed to solve for drivers who do not carry zero depreciation coverage.

However, the downside to this coverage is that due to higher payouts and increased risk to the insurance company, the premiums for this type of policy are generally higher. Whether the extra cost is worth it depends on the age and value of the property being insured. Homeowners face a similar calculation when choosing between actual cash value and replacement cost policies, and how insurers handle that choice varies between the best homeowners insurance companies.