Replacement Cost

Replacement cost in auto insurance means that, in the event of an accident or property damage, the insurance company will not cover the price of a brand new replacement. Rather, they cover the replacement cost of the vehicle after depreciation is applied to it. For example, our replacement cost estimator finds that, on a $100,000 vehicle that has depreciated for seven years, the total replacement cost value is $30,000.

Free Auto Insurance Comparison

 Secured with SHA-256 Encryption

Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

Full Bio →

Written by

Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

Full Bio →

Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Oct 30, 2020

Advertiser Disclosure

It’s all about you. We want to help you make the right coverage choices.

Advertiser Disclosure: We strive to help you make confident auto insurance decisions. Comparison shopping should be easy. We are not affiliated with any one auto insurance provider and cannot guarantee quotes from any single provider.

Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about auto insurance. Our goal is to be an objective, third-party resource for everything auto insurance related. We update our site regularly, and all content is reviewed by auto insurance experts.

In most cases when you take out an insurance policy that covers property in the United States, the insurance will not cover the purchase of a brand new item to replace a battered old one. It will instead award you a benefit equal to the replacement cost of the item.replacement cost

The replacement cost is the actual cost of the item which then has a depreciation calculation applied to it.

So what is depreciation?

It’s a calculation used for both insurance companies and accounting firms that enable the companies to find the real (true) value of an asset. Because over a period of time most things will become less valuable for example with a car you’d find that weather damage, general wear and tear etc. will reduce the value, it’s necessary for the insurer to work out how much your property is worth at the time it is lost or broken beyond sensible repair.

So when an insurer works out how much money they will pay against a claim made against a policy they have to take depreciation into account.

Here’s an example:

You buy yourself a new car and when you purchase it, it costs $100,000 to buy. Your insurer decides that the model you bought has an effective life span of let’s say 10 years. This is the period over which your vehicle will depreciate.

So in 7 years’ time your car will have lost 7/10th of its value, and as 7/10th of $100,000 is $70,000 your car will have depreciated by $70,000.

This means that the replacement cost is the original cost minus the depreciation, in our example this would $100,000 – $70,000 which leaves $30,000.

Actually depreciation calculations are a little more complex than this, partly because for auto insurance most cars lose a dramatic amount of book value when they are driven off the forecourt when they’re first purchased, but hopefully you get the idea about how it works.

Why does replacement cost matter to me?

It matters because this is the most money your insurer will pay to replace your car in the event that it is written off. In some cases depreciation can actually be greater than the remaining balance on a hire-purchase agreement which might mean that unless you have gap insurance – you’ll have to keep on paying for a car that you can’t drive anymore.

Free Auto Insurance Comparison

Compare over 200 auto insurance companies at once!

 Secured with SHA-256 Encryption