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Depreciation in Auto Insurance

Depreciation and auto insurance is an issue that has a great effect on the value and usefulness of your policy. If you have a car that has depreciated quite a bit since you originally purchased it, you already know how much the value of that car has gone down. But what you may not know is that as that value declines due to depreciation, the value and the usefulness of certain areas of auto insurance go down as well. Depreciation is tied directly to a few different parts of an auto insurance plan. As a car declines in value, the value of these plans decline as well. But they do not necessarily go down at the same rate as your policy premium. In fact, in many cases depreciation will outpace the drop in insurance prices by a considerable rate. At a certain point a fiscally responsible auto owner will recognize the need to drop certain areas of  vehicle insurance coverage. When you understand the connection of your car's depreciation to the declining value of your auto policy, you will know how to look out for this same decline in your own plan, and you'll be able to determine the right time to make changes in your coverage.

Most Cars Depreciate over Time

As many of us already are painfully aware of, most cars depreciate over time. This means that the value of your vehicle will be less than what you paid for it literally as you are driving it off the dealer lot. It is a very discouraging fact to have to deal with, but it's just the way it is. Many of us are forced to take out auto loans with long life spans in order just to afford a new car. If you are unable to put a lot of money down on that vehicle, you will likely be upside down for at least a few years. Being upside down in this connotation means owing more money on a vehicle than you could get for it if you tried to sell it. Cars are not like some other investments in this way. It's very disheartening to be working hard to finally get a car paid off, only to find that it is not worth much money anymore. At any rate, these cars are usually not worth anywhere near what we just got done paying for them.

That's the power of depreciation. And depreciation is very closely tied to the value of your insurance policy, whether you are aware of that or not. Before getting into this any deeper, a necessary disclaimer is in order: not every vehicle will depreciate over time. There are certain models that will only gain in value as the years go by if you take care of them the right way. If you buy a classic car or an antique, you probably never want to cut back on the level of insurance coverage you place on it, because it will only increase in value in most cases as long as it stays in mint or near mint condition. Some classic cars are extremely valuable even if they are not in that great of shape. These cars are rare, so if you can get your hands on one, you really have stumbled onto something worth some money.

With all that being said, most of us do not collect classic cars. For the majority of drivers, we have a vehicle that gets us to work and maybe helps us to do our job as well, but we understand that as time goes by, the financial value of the car or truck will only decline. We can slow down the depreciation process to an extent by spending the extra time and money to take good care of a vehicle, but most production cars cannot be looked at as an investment we'll make any money on.

In essence, when you buy a car most of the time, you are essentially planning on its use costing you a certain amount of money that you will not recover. That's the concept of depreciation. In the majority of cases, a car is not like a rare piece of art that a few years down the road will be worth more money than what you paid for it. Most of us just hope we can get something for our cars when we sell them to help us put a down payment on the next vehicle we buy.

Comprehensive and Collision vs. Depreciation

In a general sense, our car insurance policies are protecting our financial investment in the vehicles we own and drive. When you look specifically at the terms of your policy, at least two areas of coverage are directly tied to the dollar value of the insured car. Collision and comprehensive insurance are intimately related to the depreciation of any insured vehicle, because their value is strictly limited to the market value of the insured vehicle.

Many of us policy holders carry full coverage on our cars and think of it as a way to replace them if they are totaled or otherwise lost. But this is not entirely an accurate depiction of what we get from collision and comprehensive. If you are still paying on a three year old truck and you total it in an accident, you might be lucky to get enough money after you pay your deductible to pay off the remaining money you owe on that vehicle. It's not like a truck owner will be able to step into a new truck with the same amount of the original purchase price paid for by their insurance claim. Your collision policy is designed to help take care of the cost of your current vehicle, not the cost of replacing.

If you do not have a loan and you own that truck free and clear, you will have a nice chunk of money to help you put down a good down payment on a new truck. But you will not just be handed a new truck just like your old one. The value of your collision and comprehensive policies are depreciated the same as the value of the insured vehicle as time goes by. This is an important thing to keep in mind as a policy holder.

Knowing When to Reduce Coverage

As the owner of a vehicle and the named insured on an auto policy covering that vehicle, you have to know the right time to reduce coverage. Full coverage auto insurance is great when you have a financial interest in the vehicle worth insuring to that extent and the cost of the policy is justifiable. But when the vehicle is paid off and declining in value, your money may be better spent socking away for the inevitable replacement of that car or truck somewhere down the road, or for repair and maintenance costs to keep it on the road longer and help you avoid having a payment for a while. The way vehicles decline in value greatly influenced the wisdom of carrying extensive insurance for them as they get older. Depreciation and auto insurance is an important factor that should not ever be overlooked.


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