Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insuran...

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Oct 18, 2020

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Here's what you need to know...

  • Cars depreciate the moment you drive them off the lot
  • By the end of year two, you will have lost over 30 percent of value in depreciation alone
  • ACV stands for actual cash value

Cars depreciate most when they are driven off of the car lot. As the years go by, your car will depreciate more and more making the resale value lower than you might expect.

Just because the resale value of your vehicle goes down does not mean that the principal on your loan goes down with it.

This is why depreciation can truly affect you when you are involved in an accident and your vehicle is severely damaged.

Typically, when you buy insurance, the company is going to use the industry standard claims valuation methods to determine how much your car is worth and then decide how much you are owed.

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Understanding How Cars Are Valued


Car valuation during claims settlement can be a complex one. It is not just as simple as paying for the repairs or referencing the MSRP and then paying the total value of the vehicle when it is considered to be a total loss.

Insurance claims adjusters are employed to not only investigate claims but to pay the lowest amount possible to settle a claim without violating the terms and conditions of the contract.

This is why most car insurers have depreciation written into their claims valuation process.

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When Cars Depreciate the Most

Most people understand that their car loses value over time, but many do not know just how fast their new car depreciates.

There are what many call depreciation milestones that have a major effect on resale value, which is ultimately used by insurers when settling a claim.

You need to see which milestone you are at before any valuations are made so that you are realistic before you are offered a claims check.

The biggest depreciation occurs when your odometer goes from 0 to 1. At this time, your car goes down in value by 7 to 10 percent. Then, by the end of year one, your car will have depreciated by almost 20 percent.

By the end of year two, you will have lost over 30 percent of value in depreciation alone.

None of these figures factor in damage beyond wear and tear, which also push values down.

Within just 5 years, that $20,000 vehicle that you purchased new off of the lot is worth just 40 percent of that amount after losing 60 percent of its value.

Car Valuation and Depreciation


When you review a car insurance policy, it says that it will pay you Actual Cash Value when the vehicle is damaged and requires repairs.

Actual Cash Value, which is often written ACV, is a general term for those who do not understand how their car will be valued.

Instead of saying that you will receive up to the fair market value of your car when it is damaged, the insurer says Actual Cash Value.

Depreciation is figured into the formula in a number of ways.

Fair market value is basically what someone in the area will pay for the vehicle prior to it getting damaged in the loss.

To find this value, the company may search for similar models with similar features that have sold near you.

After this value has been determined, the insurer will then calculate the ACV by subtracting depreciation from the replacement cost.

Once each figure has been calculated, you will be made an offer for your claims settlement.

Here are some things they will consider:

  • The mileage that is on the car
  • The condition of the car prior to the loss
  • Whether or not it was already in prior accidents

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Why does depreciation have such an impact when you file a claim?

You want to get what you feel is fair when you are settling a claim.

Unfortunately, it is common for the owner of a vehicle to put more value on their car than the company that is responsible for paying out the claim.

When you have a lender or a lessor who holds the title of your vehicle, you are under contract to pay for the vehicle.

This contract does not expire just because you were in a serious accident and the car has been seriously damaged or even totaled.

If this situation were to happen, the lender would still expect payment and would be left to deal with paying off your balance when your claims settlement was much lower than you expected it to be.

You will receive a payment for the car’s ACV, but you still must pay off the balance of your loan that does not factor in depreciation.

This is why some insurance companies are now offering an added feature to their policies that eliminate problems associated with depreciation and that also wipes away some of the stress you feel when you have a claim.

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How does depreciation car insurance work?


When you buy a full coverage car insurance policy, which can also be called a fully comprehensive policy, it is easy to think that both terms are misleading because they do not fully cover you.

One industry term that you should start to learn about is zero depreciation cover.

As the term implies, when you have this cover on a vehicle you are buying a policy that offers full coverage on the vehicle without factoring in the cost of depreciation and subtracting it from a vehicle valuation.

This means that the insurer will cover the entire cost of the car, which is about 20 percent more than the amount of the damages that are covered under the standard policy.

When do I use $0 depreciation car insurance?

It is only natural to wonder why anyone who owns a vehicle that is financed or leased would choose not to buy a car policy with 0 depreciation cover

This might be a very relevant question, but many people choose not to purchase these supplements because they cost more and they never know if they will need to use them.

For a substantially higher cost, you will receive a promise that you will have a claim that is fully covered.

There are pros and cons to every type of product and most features. The pros may be that you will get peace of mind, but this does come at a cost.

There is also the factor that companies that offer this feature may not be willing to accept higher risk drivers or those with several claims.

By agreeing to pay for the feature, you also agree that you are limited to the number of claims that you can file for a period.

When Not to Choose this Feature

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If you purchased a special gap insurance policy that pays for any part of the loan, you really do not need this feature.

Knowing more than just the basics about car insurance can be helpful when and if you ever file a claim. Not only do you need to know what your policy covers, you also need to know what it does not cover.

If you are pricing the cost of insurance and you want to see how much 0 depreciation cover will cost you, you can price shop by using our FREE car insurance comparing tool below.

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