Depreciation

Depreciation is the decrease in value of something you own over time. It happens because of regular use, age, or new technology that makes older items less desirable. In everyday life, this might show up when you sell a used car or replace an old laptop. But in insurance, depreciation is especially important. It directly affects how much money you get from your insurance claim if your property is damaged, lost, or stolen.

Whether you're filing a homeowners insurance, auto insurance, or property insurance claim, understanding depreciation in insurance can help you better prepare for what to expect — and make smart choices about your coverage.

What is depreciation in insurance?

In the insurance world, depreciation refers to how much an item has lost value from when you bought it to when the damage or loss occurred. This reduced value is based on how old the item is, how much it has been used, and how long it's expected to last.

Let’s say you bought a refrigerator five years ago for $1,500. If it’s expected to last ten years, your insurance company might say it’s worth only $750 today. That’s because the fridge has already used up half of its useful life. The $750 that has “disappeared” is insurance depreciation.

Your insurance carrierance carrier uses this calculation when figuring out how much to pay for certain types of claims, especially when your policy includes actual cash value coverage.

How is depreciation calculated in insurance?

Insurance companies use different methods to calculate depreciation, depending on the type of item, its expected lifespan, and your coverage. Here are some common ways they do it:

Straight-line depreciation

This is the simplest method. The item loses the same amount of value every year over its expected life. For example, if a laptop is worth $1,200 and is expected to last six years, it will lose $200 in value each year.

Declining balance depreciation

This method assumes that items lose more value in the early years and less later on. It’s often used for technology or vehicles that drop in value quickly.

Sum-of-the-years’ digits

This approach also front-loads depreciation, meaning the item loses more value at the beginning of its life. This is more complex, but it may apply in certain commercial insurance policies or asset-heavy industries.

Regardless of the method, the goal is to determine what your item was worth at the time of the claim, not what you paid for it.

Actual cash value vs. replacement cost

When it comes to depreciation, the type of insurance coverage you have matters a lot. This is where many policyholders get surprised during the claims process.

Actual cash value

This is your property’s value at the time of the loss, minus depreciation. So if your ten-year-old roof gets damaged, you might only receive a small payout based on how much the roof was worth today,not what it would cost to replace it.

This is the default in many standard policies. It typically results in lower insurance payouts.

Replacement cost value

With this coverage, your insurance carrier pays you the full amount it would cost to replace the item with something new, without deducting for depreciation. You could replace that damaged roof with a brand-new one, and the policy would pay the current cost of doing so (within the policy limits).

Replacement coverage usually comes with a higher premium but gives you more complete protection.

If you’re comparing actual cash value vs. replacement cost, be sure to ask your advisor or review your policy so you know what to expect.

What is recoverable depreciation?

In some cases, you may be able to get back the depreciated value after you’ve replaced or repaired the item. This is known as recoverable depreciation.

Here’s how it works:

1. You file a claim and your insurance carrier pays you based on the item’s depreciated value.
2. You use your own money to repair or replace the item.
3. You submit receipts or proof of the replacement to your insurance carrier.
4. Your insurance carrier reimburses you for the difference.

This allows you to eventually receive the full replacement cost value, but only after the work is done. If you choose not to replace the item, you may only receive the actual cash value upfront with non-recoverable depreciation applying in that case.

Examples of depreciation in insurance claims

Here are some everyday examples of how depreciation shows up in insurance:

• In homeowners insurance: Your ten-year-old carpet is damaged in a flood. Because it’s halfway through its lifespan, your insurance carrier may pay half of what it would cost to replace it.
• In auto insurance: You total your car, which you bought new five years ago. Even though it cost $30,000 back then, your insurance carrier determines it’s only worth $14,000 today and that’s the amount you’re paid.
• In personal property insurance: Your TV is stolen. You bought it for $1,000 four years ago. If you have actual cash value coverage, you might only get $400–$500 depending on age and wear.

These scenarios illustrate why understanding depreciation in insurance claims is so important when planning your protection.

Why depreciation matters in insurance coverage

Depreciation plays a key role in shaping your insurance payout. If you’re not prepared, you could end up receiving far less than expected after a claim. That’s why many policyholders are surprised, when they learn their reimbursement doesn’t reflect the original value of their property.

Here are some reasons why this matters:

• It affects how much money you’ll receive for repairs or replacements
• It can create a gap between what you lost and what you’re reimbursed for
• It may result in out-of-pocket costs unless you have better coverage
• It highlights the difference between actual cash value and replacement cost

Being aware of how depreciation impacts claims helps you plan better and choose the right insurance product for your needs.

How to reduce the impact of depreciation

While you can’t stop things from losing value over time, you can take steps to manage how depreciation affects your insurance claim.

• Choose replacement cost coverage: This option costs more upfront but saves you in the long run by reimbursing the full cost of replacing items.
• Keep records: Receipts, photos, and documentation help prove an item’s value, condition, and purchase date.
• Maintain your property: Well-maintained items may retain more value, which can help during the adjustment process.
• Understand your policy: Review it regularly and ask your insurance advisor to explain what type of coverage you have and whether depreciation will apply.

Long-term planning and policy reviews

Depreciation doesn’t just affect individual claims, it also impacts your overall insurance strategy. As your belongings age, their value changes. That means your coverage needs might shift too.

• A ten-year-old roof might not be covered the same way as a new one
• Electronics lose value quickly, making actual cash value coverage less helpful
• Large appliances or furniture may no longer be worth their original price

By reviewing your policy regularly, you can make sure you’re not underinsured or overpaying for coverage you don’t need. A good insurance advisor can walk you through these details and help you plan based on the actual condition of your property.

Frequently asked questions about depreciation

Does every policy include depreciation?

Most insurance policies factor in depreciation when they calculate actual cash value. But if you have replacement cost coverage, depreciation may not apply.

Is depreciation negotiable?

Not really. However, providing proof of condition, maintenance, or purchase history can influence how the insurance carrier evaluates your item’s value.

Can I get reimbursed for the full value?

Yes, but only if your policy includes replacement cost value or recoverable depreciation, and you follow the process to claim it.

Does depreciation affect all types of claims?

It usually applies to property and belongings, but not necessarily to liability claims or medical coverage under your auto or home policy.

In summary

Depreciation is a normal part of owning property, but it becomes especially important when you file an insurance claim. It can significantly affect how much you’re paid and whether that amount will actually cover your loss.

Whether you’re filing a claim for a damaged roof, a stolen laptop, or a totaled car, knowing how depreciation works helps you manage your expectations and protect your finances. If you don’t want to be caught off guard, consider upgrading to replacement cost coverage, and keep records of your valuable items.

At VIU by HUB, we’re here to help you understand how your policy works, how depreciation is applied, and what coverage makes the most sense for your life and budget.