When you drive a new car off the lot, it immediately begins to lose value—a process known as depreciation. This decrease in value can impact various aspects of car ownership, including your auto insurance premiums.
The Basics of Depreciation 
Depreciation is the reduction in a car’s value over time due to factors such as age, mileage, wear and tear, and market demand. New cars typically experience the most significant depreciation within the first few years of ownership. As the car’s value decreases, so does the amount it would cost to replace it in the event of an accident.
Impact on Comprehensive and Collision Coverage
Your car’s value directly influences comprehensive and collision coverage. Comprehensive coverage can pay for damage to your car from noncollision events like theft, vandalism or natural disasters. Collision coverage can pay for damage resulting from a collision with another vehicle or object. Since these coverages are based on the car’s current market value, a depreciated car generally costs less to insure than a new one.
Adjustments in Premiums
Insurance companies regularly adjust premiums to reflect the depreciated value of your car. As your car’s value decreases, the potential payout from the insurer also decreases, leading to lower premiums. However, this reduction in premiums may not be immediately noticeable, as other factors such as your driving record, location and overall risk profile also play a role in determining your insurance costs.
Total Loss and Depreciation
In the event of a total loss—when the cost to repair the car exceeds its value—depreciation becomes a critical factor. Insurers will base their payout on the car’s actual cash value (ACV) at the time of the loss, which accounts for depreciation. If your car has significantly depreciated, the payout may be lower than expected, potentially leaving you with a gap if you still owe money on a car loan.
Many buy insurance to help protect against the financial impact of depreciation, especially in the early years of car ownership. Guaranteed asset protection (GAP) insurance can help cover the difference between the car’s ACV and the remaining balance on your loan or lease.
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This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.