How to calculate homeowners insurance depreciation?


It is important for you to know how your homeowners insurance company will calculate depreciation, particularly if the kind of homeowners insurance coverage you have is an actual value coverage. For actual value coverage, the insurance company will only pay for the current value of the damaged or lost item. That means that depreciation will be deducted from the original value of the item.

Depreciation is the amount that the asset "loses" due to time and normal wear and tear.

Here's how you can calculate depreciation with regards to homeowners insurance:

  • List down the properties that have been damaged and destroyed.
  • Ask you the insurance company calculates depreciation. You should know what method to use to calculate depreciation. And don't just take their word for it! To be sure that you get a fair claims payment, check whether the insurance company makes use of a depreciation table or if they make use of computer software to make the calculations. (When calculating depreciation, what you will be looking for is to account for normal wear and tear.)
  • You can also get help from some websites that provide online depreciation calculations. Use the depreciation table or the online calculator to determine the depreciated value of each item, based on its age.

To give you an idea of how deprecation can affect your claim, here is a sample calculation made on straight depreciation. Please note that some insurance companies use another method, this is just to illustrate.

The formula for depreciation is:

(Cost less Residual Value)/Useful life

Now for the example, you have a television worth $500 with a useful life set at 5 years. A storm blew away the roof and as a result your television was damaged beyond repair on the 3rd year of its useful life. You may be able to sell the damaged television for scrap at $50.

Thus, the calculation would be:
($500 - 50)/5

which comes down to $90 depreciation per year. You have used the television for 3 years, thus depreciation is at $270.

Thus, the insurance company will pay you $230 for the television.

When the insurance company pays your claim, be sure to check each item to see that depreciation is correctly computed and deducted.

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