FAQ: What is a Depreciation Waiver?
Friday, 20 August 2021
If you are in the process of buying a new car, or you’ve just signed on the dotted line – congratulations! Along with that amazing new-car smell comes a choice to purchase a coverage on your auto insurance called a Depreciation Waiver. We are going to explain how it works in this blog and how it can protect you financially if you had an accident and needed to make a claim.
What is Depreciation?
Depreciation, simply put, means that the value of an item will decrease over time. Unlike a home that usually appreciates over time (increases in value), your vehicle becomes less valuable over time due to regular use and wear and tear. In fact, on average a new vehicle will lose 20% of its value within its first year of use, and by the time 5 years rolls around, it has usually lost 40% of its worth.
How Does Depreciation Affect Car Insurance?
When it comes to making a car insurance claim, depreciation affects how much you will receive from your insurer and could put you in a less-than-ideal situation without the right coverage. Car insurance is intended to restore you to the same position you were in at the time of the loss (accident, theft, vandalism, etc.). The amount you’re reimbursed could be calculated two different ways.
Actual Cash Value: The dollar amount you would receive is equal to the amount the vehicle is worth at the time of loss. This calculation takes into consideration depreciation and the physical condition your vehicle at the time of the accident. Depreciation is based many factors including vehicle age, odometer reading, make & model, fuel economy, and general wear and tear.
Replacement Cost: The dollar amount you would receive is equal to the amount you would need to replace your vehicle with a new, similar vehicle — no more, no less.
Car insurance policies use the Actual Cash Value calculation in most scenarios.
How Does Depreciation Affect Car Insurance Claims?
If you’re in an accident and your two-year-old vehicle is totaled, your insurer would typically give you the Actual Cash Value (depreciated market value) of the vehicle – not the Replacement Cost. The tricky part of this situation is if you still have a lien on the car, you would be left to pay your lienholder for the difference that your insurance doesn’t cover. This could end up being a massive outstanding debt for a car that doesn’t even exist, which could lead to serious financial problems – all because of depreciation!
Luckily, this can be avoided if you get a depreciation waiver on your car insurance policy for your new car!
Depreciation Waiver Saves the Day (and your wallet!)
A depreciation waiver removes your insurance provider’s right to deduct depreciation from the value of your vehicle in an insured claim. It ensures that they will provide the Replacement Cost for your car during a set period of time (usually 1-3 years after the purchase). If you are in an accident and your car is lost or irreparably damaged, the depreciation waiver guarantees that you will be covered for the full purchase price, the manufacturer’s suggested retail price, or the cost to purchase a new vehicle of similar make, model, and quality.
Some insurers also offer additional coverage in a partial loss scenario that guarantees you will receive genuine manufacturer replacement parts, not generic parts. Ask a BIG broker about our carriers that offer this as a part of the depreciation waiver coverage!
Are You Eligible for a Depreciation Waiver?
You can purchase a depreciation waiver on your car insurance policy if you meet the following criteria:
- You are the first owner of the vehicle (or lessee)
- The vehicle is less than 3 years old
- You have Collision & Comprehensive or All Perils. (Learn about Physical Damage Coverages)
- You have the Depreciation Waiver on your current policy and are switching to BIG
When you add the depreciation waiver to your car insurance policy, your BIG broker will ask for your vehicle bill of sale. If you are switching to BIG from another insurance provider, you may also be asked to show proof of the depreciation waiver on your previous policy.
Other Things to Know About the Depreciation Waiver
First, if you are dealing with a claim and have the depreciation waiver coverage, you will still need to pay your insurance deductible.
The cost of additional tires (winters), batteries, after-market upgrades or parts are not included in the amount you would receive from your insurance company.
For a claim to be eligible for the depreciation waiver coverage, it must occur before your policy expires.
Enjoy your new wheels worry-free! The depreciation waiver is totally worth the few extra dollars a month that could save you thousands, not to mention incredible financial hardship and stress. If you have a new vehicle, add it to your policy today! Contact a broker now, or get a quote online.