Zero Depreciation Car Insurance: What Is It and Is It Worth The Cost?

Zero depreciation car insurance helps to fill the gap between what you owe and what your car is worth. Although it saves you money later, a zero depreciation car insurance policy will increase your rates. You will have to do the math to decide if zero depreciation car insurance cost is worth it for your car insurance.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jul 30, 2020

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Here's what you need to know...

  • Zero depreciation car insurance is different from regular car insurance
  • If you have purchased a new car and it is totaled, you may owe more on it than you receive from insurance because the car has depreciated faster than you are paying your loan
  • Zero depreciation insurance helps fill that gap between what you owe and what your car is worth

When a consumer buys full coverage, they often assume that the policy will pay for the full value of the car.

Unfortunately, the vehicle owner’s idea of replacement value and the car insurer’s definition of replacement value are generally two very different figures.

Any consumer that assumes full coverage means full value could be sadly mistaken when they are in a position that they need to file a claim.

The key to eliminating the misconceptions and protecting yourself is understanding how insurance works and how you can fill in the gaps that exist in coverage.

While price and coverage limits are important, understanding claims valuation is important as well

Start comparing car insurance rates now by using our FREE tool above!

Read the Fine Print on the Policy Terms

You should always take the time to brush up on your car insurance policy before you need to file a serious claim. There is nothing worse than just assuming your policy provides comprehensive cover and fair terms.

You will need to get your policy booklet out and review the terms and conditions of the policy to see how much your car would actually be worth in the eyes of the insurer before you even bind the coverage.

It is too late when you wait until it is time for a claims settlement. This is why you should review the standard valuation process and then skim through your policy to see if you have a standard policy.

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How are cars valued under the standard insurance policy?

If you review your policy declarations page, you will find that it shows if you carry physical damage coverage and how much your deductible is for comprehensive and collision claims.

If you have the standard policy, written next to the deductible it will say ACV or Actual Cash Value. This is how the vehicle will be valued when a claim is filed.

Actual Cash Value, which is the insurance term for fair market value, is an industry way to say that the company will pay you what a reasonable person would pay for the car before the loss occurred.

When performing calculations, the insurer will use the cost of the replacement in similar condition minus the cost of depreciation.

Most people know that cars depreciate over time, but even cars that were just driven off of the lot are not worth what they were worth when the sales contract was signed.

Your idea of current value and the insurer’s are often in different worlds. This is because of all of the different factors that subtract from a car’s value.

Some of the many different factors an insurer considers to calculate depreciation include:

  • Age of the vehicle
  • Mileage
  • Interior and exterior color
  • Safety and comfort features
  • Make of the vehicle
  • Maintenance records
  • Condition of paint
  • Accident history
  • Number of owners

What is zero depreciation coverage?

Now that you know how cars depreciate and how insurers take advantage of this, it is time to learn how valuations different when you select a plan with a zero depreciation or replacement cost feature.

Zero depreciation cover does not factor in depreciation and subtract it to your claims payout.

Instead, it is a fully comprehensive type of cover that will pay for the entire replacement of your car.

Since zero depreciation cover promises you full settlement, you will not be stuck paying for thousands of dollars that remain on your loan or for the money that your insurer will not pay to replace your car with the same kind of vehicle.

Having a standard policy can land you in troubled water financially or can cause you to settle for a lower grade vehicle because you will not be able to afford a good replacement.

Is zero depreciation coverage worth the added cost?

You might be wondering why anyone would choose a standard no-frills car insurance policy when there is the option to buy a policy that does not depreciate your car’s value.

The main reason, for those who are familiar with both, is because the rider for zero depreciation comes at a cost.

There are obvious advantages to the rider, but you will be paying a noticeable difference in premiums each month.

To determine whether or not the specialized rider is worth the added cost, you need to decide if you want to pay more now to possibly save during a claims settlement in the future.

You never know if you will experience a loss, but if you do you will be stress-free in knowing that you will not have any problems with claims valuation.

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Difference Between Gap and Zero Depreciation

Many consumers ask what the difference between zero depreciation and gap insurance is.

The main difference is financing. Gap insurance pays the difference between the loan balance and claims payment.

If you are financing, this could be a more affordable alternative.

If you are ready to shop for coverage so that you can compare premiums, it is time to get started.

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