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Auto Insurance and Your Car's Depreciation

Auto insurance and your car's depreciation are more closely related than you might guess. Most of us are well aware of the concept of depreciation. It is that strange phenomenon by which our cars lose their value seemingly faster than we can even get them paid off. Once you finally have paid back the bank and own your vehicle free and clear, looking up its fair market or blue book value can be very depressing. If you take five years to pay off a new car or truck, it might be worth half what you put into it if you're lucky. Depreciation is a frustrating thing to have to deal with as an auto owner. But it also directly influences your auto policy in ways you might not have thought about.

Financed Vehicles and Full Coverage

When we go to the auto dealership to buy that brand spanking new automobile, part of the bargain as the paperwork is signed is that we have to present some kind of proof of insurance before taking the car home with us. When you finance a new vehicle purchase, full coverage is required. In addition to liability insurance and any other coverage required by your home state, you must add collision and comprehensive coverage according to the wishes of the entity providing financing for the transaction. The combination of liability, collision and comprehensive insurance all in one policy is commonly known as "full coverage" auto insurance, although this is in some respects a misnomer. After all, there are other riders and endorsements available aside from these three. And no matter how much you insure a vehicle there will always be limitations and exclusions of coverage.

But with all that being said, suffice it to say that the cost of collision and comprehensive insurance ought to be figured into your automobile budget any time you set out to purchase a vehicle. Unless you can pay cash, these are as much a part of the deal as that spare ignition key or the floor mats. And honestly, when a car or truck is still new, collision and comprehensive insurance are very important and extremely valuable. If you get into an accident and total your new ride, you will still be obligated to pay it off per the terms of your contractual agreement. Having solid insurance protection can help you manage that payoff and get out from under a wrecked vehicle financially. So obviously there is a great deal of value in collision and comprehensive in a new car or truck.

When Depreciation Creeps In

But as time goes by, the value of these policies goes down. The only notable exception to this rule is in cases where you have chosen to take on replacement coverage rather than cash value collision and comprehensive insurance. But not every insurer even offers this option, and not many people can afford it while they are also making an installment loan payment on their new ride. It is hard enough just keeping up with the payment and insurance bill as it is.

So in most cases as depreciation begins to creep in, the real cash value of both collision and comprehensive insurance declines right along with the value of the vehicle. As this occurs, the return on investment that you get out of paying for these modes of coverage goes down, because the price of these policies usually does not drop as quickly as the value of the vehicles in terms of ratio to original cost. At some point, it comes time to consider dropping collision and comprehensive coverage from your policy altogether. In some cases, drivers are compelled to do this as soon as they pay their vehicles off. Especially in low end models that do not hold their value as well, five years is a long time and the value of a vehicle that old may be miniscule even if it is in good condition.

Know When to Make Adjustments

Depreciation and auto insurance are joined at the hip in some ways. The choices you make as an auto owner are based on the coverage you need and the value of your vehicle. Insuring a car that has lost most of its monetary value is bad money. Those funds are better used in savings for repairs on your aging ride to stretch out that time with no payments and cheaper insurance, or in saving up for your next new car. A bigger down payment can mean less money borrowed and a faster payoff, which in its own way represents a small victory over automobile depreciation. If you know when to make adjustments to your insurance and to start channeling money away in other directions, you'll be set better for circumstances down the road.


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