Depreciation refers to the decrease in the value of an asset over time due to wear and tear, age, or obsolescence. In the context of insurance, depreciation is particularly relevant when determining the value of an item for claims purposes. When an insured item is damaged or lost, insurers often calculate the claim payout based on the item’s actual cash value, which takes depreciation into account, rather than its original purchase price or replacement cost. This means that the compensation for the item will be less than its original cost or its replacement value, reflecting the reduction in value that has occurred over the time the policyholder owned the item. Depreciation is a key factor in property and auto insurance policies, where the value of physical assets naturally diminishes over time. Understanding how depreciation affects insurance payouts is important for policyholders to set realistic expectations regarding the amount they can recover in the event of a claim.
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