How car insurance can offset depreciation

Car insurance protects you from the costs of accidents, damage to your car, theft and injuries you cause to others while driving. Without car insurance, you would have to pay for these expenses out of pocket, and the costs could be unaffordable even for a minor accident.

While car insurance can reimburse you after a covered peril causes damage to your car, or if you’re found liable for injuries caused in a car accident, it doesn’t cover depreciation. Depreciation, the loss of your car’s value from regular use over time, isn’t considered a peril in the way car insurance defines perils because it’s a normal and expected part of owning and driving a car.

However, some types of car insurance can offset depreciation, not by paying for the depreciated value itself but by reimbursing you for more than the cost of the car’s depreciated value if the car is totaled after a covered peril.

Read on to learn how car insurance can offset depreciation.

How car depreciation works

From the moment you drive your car off the lot, its value has depreciated. That’s because it has officially transitioned from a new car to a used car, which cannot be resold as new.

The normal, day-to-day driving you do with the car will also cause it to depreciate. As mileage accumulates, so does wear and tear. Engines slowly degrade over time, suspensions lose durability and scratches and dents may accumulate on the exterior – even if you’re careful. Repairs can be pricey, so the car’s depreciated value is essentially a function of the risk the driver assumes that the vehicle will need maintenance at some point.

More severe damage, such as being in an accident, will cause the car to depreciate in value much faster. While car insurance will cover the cost of repairs if a covered peril caused the damage and the cost falls within your coverage limits, the car’s accident history will permanently reduce its value.

Does car insurance cover depreciation?

Car insurance doesn’t cover depreciation because it is not a peril but an inevitable part of owning a car.

Car insurance will pay for covered repairs to your car if it’s damaged, which could slow the rate of depreciation compared to not having the repair completed. However, this does not offset depreciation per se.

However, some car insurance policies can offset depreciation. The way this works is that, after a covered loss, rather than reimburse you for the depreciated value of the car—what’s called the actual cash value—your car insurance will reimburse you for either the cost of replacing the vehicle as new or for a predetermined value that could exceed its depreciated value.

We’ll go over these types of car insurance next, but it should be noted that these options will likely be more expensive than simply getting actual cash value car insurance. Because cars depreciate in value even when driven safely or infrequently, you need to decide whether these types of car insurance are worth considering just to offset depreciation.

New car replacement coverage

If your car is totaled in a covered loss, new car replacement coverage will pay to replace it with one of the same make and model. Typically, this type of car insurance must be purchased soon after buying the car, and its coverage only applies for the first two to five years of ownership or the first 15,000 to 25,000 miles, depending on your policy. After that, insurers typically use the actual cash value (ACV) calculation for your car.

“To have a little more peace of mind in the event of a total loss,” says Ezra Peterson, vice president of insurance at Way.com, “some carriers will also offer a better car replacement or a coverage enhancement that will increase the ACV valuation of the vehicle to one model year newer, or reduced mileage factor to help cover the difference between the actual cash value and true replacement cost through a dealership.”

Replacement cost value car insurance

Replacement cost value car insurance, or RCV, will reimburse you for buying your car new after your car is totaled in a covered loss. The insurer will either pay for you to purchase a new car of a similar make and model or allow you to put the funds toward buying a different car.

This type of car insurance offsets depreciation by not considering depreciation when calculating when you’re owed. It’s often contrasted with actual cash value car insurance, which only reimburses you for the car’s value minus depreciation before the loss.

“Unlike actual cash value coverage, which deducts depreciation, RCV provides a higher payout that more closely aligns with what a car of the same year, make and model would cost at retail,” says Kristi Ware, sales manager at Guardian Service, an insurance agency.

Agreed value car insurance

Agreed value car insurance is built for classic cars and other types of vehicles that are more meant to be collected than driven. Also called “guaranteed value” car insurance, this type of coverage will reimburse you for the loss of your car based on a valuation of the vehicle that you and your insurer agreed to at the time of signing the policy.

In some cases, you’ll need to submit documentation, like photos and appraisals, to the insurer to provide evidence of the valuation you’re claiming. Agreed-value car insurance offsets depreciation because it may depreciate from its agreed-upon value over time.

Stated value car insurance

Stated value car insurance can also offset depreciation. It works like agreed-value car insurance, except that you’re stating the value when taking out the policy and the insurer isn’t required to honor your valuation if it reimburses you for a covered loss. 

However, the insurer will undoubtedly consider the stated value, especially if you can back up your claim with documentation, but they’ll typically only reimburse you for the lesser of the stated value or actual cash value of the car.

How gap insurance protects against depreciation

When your car is totaled in a covered loss or stolen, guaranteed asset protection insurance, or gap insurance, pays for the difference between the actual cash value of the car and the remaining balance on your loan or lease. (You’ll still need to pay the deductible part of your car insurance coverage, and your gap insurance may be subject to a coverage limit.)

This type of insurance is an optional add-on to your car insurance policy if you own your car and may be required if you lease your vehicle. 

Because the remaining balance of your loan is effectively the equivalent of the remaining balance of your car when bought new, gap coverage helps you recover some of the future depreciated value of your car. Otherwise, your vehicle would continue depreciating over the course of the years you’re making loan payments.