How Depreciation Impacts Your Home Insurance

WRITTEN BY: Mark Romero

UPDATED: MAY 08, 2023 | 1 MIN READ

Depreciation is a process whereby an asset loses value over time, which allows it to be replaced or repaired. This can affect home insurance depending on the type of policy you have.

Some home insurance policies consider depreciation amounts when paying out an insurance claim. Knowing if your policy will payout minus depreciation is important before beginning the claims process.

What is Depreciation?

Depreciation is the amount of money your house loses in value from when you buy it to when you sell it. This can be due to wear and tear natural disasters, or other factors.

The way that depreciation affects your home insurance is relatively simple: If the value of your home has gone down, the amount of coverage you’re entitled to will also go down.

However, there are ways to increase your insurance coverage by taking precautions and ensuring that your house doesn’t lose too much value over time.

How Does This Impact Dwelling Coverage?

The impact of depreciation on home insurance coverage can be significant for homeowners and insurers. When a roof depreciates, so does the value of the dwelling, and depreciation affects what homeowners pay in premiums.

Depreciation can also affect how much dwelling insurance providers pay out to homeowners when they make claims after disasters such as fires or floods.

Roofs typically have a life expectancy of between 15-30 years. If your roof is too old, you may not receive the full replacement cost in your claim payment.

How Does This Impact Personal Property Coverage?

When damaged items have exceeded their estimated useful life, you may not receive reimbursement for the full replacement value of the item. For example, a laptop may only have an estimated life expectancy of ten years. If you claim for it after five years of use, you may only receive half the laptop’s value due to depreciation.

Actual Cash Value Policies vs. Replacement Cost Policies

It’s important to note the differences between policies to ensure you know what to expect when you file a home insurance claim.

ACV Policies

Homeowners insurance usually pays out based on the depreciation of your home. That means if you have a $100,000 home that declines to $50,000 over a year, you would receive a check for $50,000 from your insurance company.

Replacement Cost Coverage Policies

A replacement cost policy is a policy that pays the cost of replacing your lost or damaged property. If you have a car worth $10,000 and it gets totaled, then you could claim the amount of money it would cost to replace that car. A cash value policy pays out the amount of money your property would be worth in its current condition.

Recoverable Depreciation vs. Non-Recoverable Depreciation

Home insurance companies typically offer a replacement cost claim to replace their insured possessions that have been damaged, destroyed, or stolen. Replacement costs are paid in two parts: the actual cash value and recoverable depreciation.

After you have made your claim, the insurance company will send you a check for the ACV amount minus your deductible. You can then proceed to have the damaged items repaired or replaced.

Once you have made your insurance company aware that the work has been completed, they will reimburse you for the cost of the new items with a second check. The difference between these two values is recoverable depreciation.

Non-Recoverable Depreciation

If you have an actual cash value policy, the amount of reimbursement you receive after a claim will be based on the depreciated value of the item that has been damaged. This is known as nonrecoverable depreciation.

What Factors Affect a Property’s Value?

Factors that can affect a property’s value include:

  • location
  • size and style of the property
  • number of bedrooms and bathrooms
  • property’s age
  • proximity to public transportation and schools
  • any modifications or upgrades made to the property

Tips for You to Reduce the Cost of Your Home Insurance

Home insurance can be a costly investment, but you can take steps to reduce the cost. You can reduce the cost of your home insurance by following these suggestions:

Getting a quote from multiple providers

One of the most effective strategies is getting multiple quotes from different providers. This will allow you to pick and choose the coverage that best fits your needs and budget.

Maximize your discounts

You may not even think to ask for discounts when looking at insurance quotes, but you may be entitled to some. This is especially true if you bundle your auto insurance with your homeowners insurance policy.

Shop around for lower rates

You can take several steps to reduce the cost of your home insurance, such as shopping around for better rates or checking out different kinds of coverage.

Consider a policy with higher deductibles

A deductible is an amount you have to pay out-of-pocket before your insurance company pays anything toward your claim. Policies with a higher deductible typically offer lower premiums.


What does depreciation mean in home insurance?

Depreciation is a process in which the cost of an asset is gradually reduced over time. In-home insurance depreciation refers to the decline in the value of a home over time due to wear and tear.

The amount of depreciation depends on how many years the policy will cover. It also depends on how much wear and tear has been incurred with each year’s coverage.

Does homeowners insurance pay by depreciation?

When home insurance pays out for your claim, it may take depreciation into account, depending on your insurance policy.

An actual cash value (ACV) policy will include depreciation in their calculations for claims. In contrast, a replacement cost value (RCV) policy does not deduct anything for depreciation.

How do insurance companies come up with depreciation?

The depreciation of an asset is the loss in value of a used asset over its lifespan. To calculate the depreciation, an insurance company needs to know how long the item will last. The duration of use is usually based on how long it takes for the item to reach its end of life.

The cost of an item is split into two parts: the purchase price and the value at which it’s sold. The purchase price is subtracted from the value at which it’s sold, giving us a figure we can work out as our depreciation.

What are the reasons for depreciation?

A combination of factors causes depreciation. The condition of the house, including any wear and tear or any property damage, can have the biggest impact. The age, location of the house, and economy can affect the depreciation of a house.

What is the difference between depreciation and replacement cost?

Depreciation is the process of diminishing the value of an asset over time. It refers to the gradual wearing out or consumption of a fixed asset. Replacement cost home insurance is the cost to replace or rebuild a home and covers all losses caused by fire, theft, natural disaster, and more.

What is the difference between a total loss and a partial loss?

A total loss is when a home is destroyed. A partial loss is when all the contents in the home are damaged, but the home’s structure remains intact.

A total loss means that your insurance company will cover the cost of rebuilding your house and repairs. A partial loss means that your insurance company will only cover what was lost, and you’ll have to pay for any repairs yourself.

Does depreciation affect the price of homeowners insurance?

Depreciation can affect the price you pay for homeowners insurance. Policies with the cheapest premiums are likely to consider depreciated values when calculating payout amounts for claims.

A replacement cost value policy (RCV) is a type of coverage that does not take depreciation into account, but the monthly premiums will be higher.

What is the purpose of depreciation in home insurance?

Depreciation is one of the most important concepts in insurance. It’s the process by which an insurer adjusts its asset values to reflect changes in the condition of a property.

In-home insurance, depreciation is used in calculating the cost of a claim, such as damage or loss. It’s also used to determine how much a policyholder will be compensated for a policy-covered loss.

How to Get Help Understanding Home & Property Deprecation

Many homeowners are unaware of the depreciation of their homes and property values, which can cause financial loss.

Property insurance companies offer various policies to protect you from these financial losses that might cover your home in case of a fire or flood. Compare potential insurance quotes to ensure you receive the best value for your money.