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Depreciation insurance is a type of insurance coverage that protects against losses due to damaged property. Unlike some other types of insurance, it does not involve the subtraction of depreciation from the value of the property. Instead, the insurance holder can receive the replacement or repair value of the property in question.
With typical insurance policies, depreciation does come into play with payout amounts. If a person suffers the loss of property, the insurance company will usually apply depreciation figures to the property to determine the amount to give the insured party for replacement. For example, if an individual’s stereo system has to be replaced because of an insurance-covered event, the insurance company might consider the cost of replacing the stereo as well as how much the used stereo is currently worth. Many insurance policies only provide for the reimbursement of the property’s current worth. This means the insured person may receive far less money than he would need to purchase a new stereo.
Depreciation insurance policies, however, allow the insured party to collect the cost to replace his covered property rather than having to settle for the depreciated value. For example, if a person’s two-year-old computer is stolen, he cannot expect it to be worth as much as it was when he purchased it brand new. If he only receives reimbursement for its actual value, he may not receive very much. If he has depreciation insurance, however, his insurance company will have to give him the money to replace his computer with a new model. As such, many people find this type of insurance policy preferable to those that only reimburse the current value.
An individual might also benefit from depreciation insurance in the event that he has to repair a piece of property rather than replace it. For example, if an individual has this type of insurance, his insurance company will usually cover all of the cost of repairing his damaged property, even if the property is worth much less than when he originally purchased it. If he only had the actual-value type of insurance, he would likely recover much less money.
Often, people do not realize they do not have depreciation insurance until it is too late and they have suffered a loss of some sort. Too often, people assume their insurance will cover the full cost of repairs and replacement and then suffer an unhappy surprise when they file a claim. To avoid this, a person may do well to carefully review his policies and request changes as desired.