How Does Car Depreciation Affect Your Insurance

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How Does Car Depreciation Affect Your Insurance

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Your car is never worth as much as it is at the moment you drive it off the lot. Every mile depreciates the value as it adds wear and tear. The older your vehicle is, the less it’s worth. That makes sense when you think about it but it can be a shock to people when they get in an accident and they find out how little their insurance company is willing to pay.

What Is Vehicle Depreciation?

Car depreciation is the difference between what your car was worth when you bought it versus what it’s worth if you were to sell it or trade it in. The more miles you put on it and the older your vehicle is, the more your car’s value will decrease.

As a rule of thumb, a car can depreciate by roughly 20% after the first year and 60% within five years depending on make and model, mileage, and condition of your vehicle. If your vehicle has damage or lots of wear and tear, the depreciation will be greater.

This is where a tool such as the Kelley Blue Book can come in handy. It’s an industry standard for measuring the value of a car over time and a good place to check if you’re trying to see what your car’s worth. Here’s how depreciation works. Let’s say you bought a new car — a fully-loaded Toyota Prius for $30,000 in 2017. You’ve put 40,000 miles on it since then. It’s in excellent condition and still looks brand new. Today, however, it’s only worth roughly $13,000 as a trade-in or $15,000 in a private sale.

The depreciation reduced the cost of the vehicle by 50% or more in just a few short years.

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So, how does car depreciation affect car insurance? It does so in several ways.

How Does Car Depreciation Affect Car Insurance?

Your vehicle’s depreciation will play a significant role in what your auto insurance policy will pay in case of an accident.

First, let’s talk about what won’t be affected by depreciation. That includes things such as property damage insurance, bodily injury, or personal injury. These insurance products cover the damage resulting from an accident and not the vehicle itself.

Comprehensive and Collision Coverage

The biggest parts of your auto insurance policy are more directly affected by your car’s value, such as collision coverage, comprehensive coverage, and uninsured/underinsured coverage. Let’s examine the differences.

  • Comprehensive coverage may be a bit of a misnomer. By its name, you might think it provides complete coverage for anything that happens. That’s not the case. It does cover damage to your car from things like fire, theft, vandalism, or storm damage. 

  • Collision coverage is the part of your policy that kicks in when you’re in an accident whether you’re involved in an accident with another car or go off the road and hit a tree.

  • If you’re in an accident with someone that isn’t insured, or they don’t have enough insurance to cover the damage or medical bills, uninsured/underinsured coverage will come into play.

In each case, however, depreciation is taken into account. Traditional auto insurance policies aren’t going to reimburse you for the price of a new car. It’s designed to make you whole for the present value of your car. 

If your 2017 Toyota Prius is totaled in an accident in 2021, you’re not going to get the $30k you paid for it. Your check will be based on your car’s present value before the accident. This can come as quite a shock to car owners the first time it happens. While they’re expecting to get a new car, what they’ll get is enough to be a comparable used car with similar wear and tear. 

Getting Upside Down on Your Auto Loan

Because cars tend to depreciate quickly and people are extending auto loans out for longer periods, it can also cause vehicle owners to be “upside down” on their vehicles. In other words, they owe more money on the loan than the car is currently worth. That’s a double whammy when you get a check from your insurance company and it doesn’t even cover what you still owe on your current vehicle. It can leave you in debt and without a vehicle.

It’s another reason to check your policy carefully and make sure you have an adequate amount of insurance to protect yourself.

New Car Replacement Coverage

Many insurance companies will also offer new car replacement policies. For example, if you buy a new car and it gets totaled in an accident in the first couple of years, you may qualify for full replacement value. This allows you to go buy another new car. 

Instead of getting the $15,000 your totaled Toyota was worth, you’d get enough back from your policy to go get a brand new one. Of course, you’ll pay higher rates for this type of policy because the potential liability for the insurance company is higher.

It Pays to Shop Around for Auto Insurance

These are some of the reasons you should shop around for vehicle insurance and make sure you know exactly what you’re getting from your insurer. If you’re looking at auto insurance, it pays to go online and compare options to find the best policy to make sure you have the right amount of coverage you need at the best rates.

For example, exploring pay-as-you-go or per-mile rates may be an attractive option – especially for those now working at home that aren’t driving as much. Low mileage also should translate to lower insurance rates and less depreciation on your vehicle.

Here’s another reason why you should shop around every so often for auto insurance. While your car depreciates in value, often the amount you pay for your vehicle insurance stays the same. Each year you keep the policy, the payout in case of an accident is less. When the rates don’t change, that just means your insurance company is making a bigger profit. Shopping around, or discussing reductions with your current insurer, might get you a better deal.

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