Buying a brand new car is pretty darn exciting. You’ve worked hard for this, and now it’s time to hit the road and bask in the glory of that new car smell. However, before fully immersing yourself in the experience, it’s wise to consider a depreciation waiver for your new car insurance policy. Let’s take a closer look at how it all works.

How does depreciation impact car insurance?

Some experts suggest a new car decreases 10% in value after the first month and even more in the first few years. Depreciation affects all kinds of things, as the item’s value decreases over time — usually due to everyday wear and tear.

In the context of car insurance, your new car will depreciate for various reasons, such as how much you drive and how well you’ve maintained it. Depreciation affects how much you’ll be reimbursed when you make a car insurance claim. Insurance should return you to the same position you were in just before a loss. To do this, your insurance provider will use one of two calculations to determine a reimbursement amount if your vehicle is stolen, lost or fully damaged.

• Actual Cash Value: The dollar amount you’ll be paid equals the amount the vehicle is worth today. While this calculation may consider the original price you paid for your vehicle, it also considers depreciation and the condition of your vehicle on the day it was lost or damaged.
• Replacement Cost: The dollar amount you’ll be paid is either 1) your original purchase price, 2) the manufacturer’s suggested retail price, or 3) the replacement cost, depending on which is lower. It’s critical to note that this calculation is only used if you purchased a depreciation waiver endorsement.

What is a depreciation waiver in car insurance?

A depreciation waiver puts a value on your car that stays in place for a set amount of time, typically 1-3 years after the purchase. If your vehicle is lost, irreparably damaged, or totalled during this period, your claim will be settled in one of three ways. To summarize, you will receive whichever of the following is lower:

• The amount you paid for the vehicle.
• The manufacturer’s list price for the vehicle, with similar trim and equipment as the original date of purchase.
• The cost to replace the vehicle with a new one with similar options and equipment.

These amounts include all applicable taxes. With a depreciation waiver on your car insurance policy, you essentially get back the amount you spent on the vehicle.

Who is eligible for a waiver of depreciation?

It is important to note that a depreciation waiver is only offered to the vehicle’s first owner. This means anyone purchasing a used car, regardless of its condition or value, is not eligible. If the vehicle changed ownership through a sale or even as a gift, the second owner probably wouldn’t be eligible. Also, depreciation waivers are usually only offered on newer vehicles, with many insurance providers limiting the waiver to vehicles under three years old.

Our Bauld Insurance Advisors can review your car insurance policy to ensure you are well protected. Visit our web page for more information and frequently asked questions on car insurance or to request a quote.