The truth behind travel insurance depreciation and how much money you'll get back if you're items are stolen overseas
Many people assume travel insurance policies will pay out the original value of their lost and stolen items overseas. Unfortunately, this is not the case. as insurers factor in something called depreciation on every item covered under the policy.
What exactly is travel insurance depreciation?
Depreciation is the reduction in value of an asset over time due to:
- Wear and tear
- Obsolescence (whether it is still useful)
Insurers calculate depreciation on your luggage and personal items using similar international standards. Rates of depreciation typically depend on the following:
- Type of item. Certain items like electronics will depreciate more quickly than items of clothing.
- Age of the item. The older an item is, the more depreciation is applied to it.
- Condition at the time of loss or theft. If the item is already worn, then a greater depreciation charge will be applied to it.
- Usable life. How many years the item is expected to last e.g. a phone has a shorter life span than a luggage bag.
Check with your provider
Read the depreciation rules for your particular policy carefully before purchasing. While insurers follow accepted universal standards regarding an item’s type, age, condition and usable life, each insurer will weigh each factor slightly differently e.g. some providers will simply deduct 10% off the items value each year whilst others will have a more complicated process.
While you may own an item for a number of years and it may operate without a hitch during that time, insurers are a little more conservative when evaluating an asset’s life. Typical life expectancy terms they apply include the following:
|Mobile phones, laptops and tablets||3yrs|
|Cameras and video cameras||7yrs|
What if my item has passed its usable life?
If an item is older than its usable life, an insurer will pay a flat rate usually around 25% of the purchase price. This is known as the residual value.
Quite often this will differ according to many factors like the condition of your laptop as well as the how the insurer interprets depreciation. The following example details how an insurer might depreciate a laptop that is stolen.
Joanne's partially covered laptop
After a week-long business conference in London, Joanne flew down to Ibiza to party for the weekend before coming come to Australia. Unfortunately, her $1,000 laptop was stolen by a local, despite leaving it secure in her hotel. When Joanne made a claim, she received a total of $650.
Why didn’t Joanne get paid the full $1,000?
The benefit received by Joanne reflected a $250 depreciation of her laptop and a $100 excess charge.
How exactly is depreciation calculated
A common travel insurance practice is to calculate depreciation by:
- Assessing the usable life of the item
- Finding the difference between the original cost of an item and the residual value (the left over value once it reaches its usable life)
- Dividing this difference by usable life of the item to get the yearly depreciation rate
- Applying this rate to how long the item has been used
- Original cost of laptop = $1,000
- Age of laptop = 1 year
- Total life of the item according to the insurer = 3 years
- Residual value set by the insurer = $250
- Depreciation rate = $1,000 - $250 = $750 divided by 3 years = $250 per year
- Depreciation of the Joanne's laptop over one year = 1000-$= $250
- Benefit after depreciation = $750
- Total benefit after excess charge = $650
How much is depreciated over three years?
This is how travel insurance depreciation can look over time. From three years and onwards, the insurer will only pay out the residual value of the laptop.
One way to avoid this depreciation charge for your laptop would be to list it as a valuable item in your policy.
Some insurers let you avoid depreciation on your personal items by listing them as valuable items and paying an extra premium for them. The cost of this premium varies with each insurer and the maximum amount will vary with each insurer.
Why paying an extra premium to insure a valuable item can go a long way
Extra cover for a valuable item is not that expensive when you consider the potential cost of depreciation your item receives without the cover.
This graphs is for illustrative purposes only and is not indicative of an actual policies valuable items cover.
Is it worth it after just one year?
In this example, the premium for the $1,000 laptop to be listed as a valuable item with a typical insurer is around $50. If the laptop had not been listed as a valuable item, depreciation would have reduced its value to $650 after excess. Paying $50 for an extra $200 worth of extra cover makes financial sense.
Check with your provider
Different travel insurance providers have different way of both assessing depreciation as well as premiums for valuable items cover.
Keep your proof of purchase and ownership
You can minimise the amount of depreciation an insurer applies to your claim by keeping good records of documents related to your item, such as proof of purchase and recent photos proving it was in good condition. Proof of ownership can come in the form of:
- Bank and credit card statements
- If the item was a gift, secondary proof of ownership in the form of a notarised statement by a third party.
Leave items you don’t need at home
Each item you list as valuable will require a separate premium. Having less items can be more cost effective, and you don’t want to carry too many valuable items with you on your trip.
Take care of your belongings
The best way to minimise depreciation on your claim is to not have to make a claim in the first place. If you take extra care of your belongings while on holiday, they are less likely to be lost or stolen. Ways to do this include:
- Putting your valuables in a money belt while carrying them or in a locked safe when not in use
- Not leaving your bags unattended or unsupervised
- Not accepting help with your bags offered by strangers at airports or train and bus stations.
- Not travelling alone at night in unfamiliar areas
- When consuming alcohol, drink in moderation and be aware of your surroundings at all times.
Proof of ownership is vital when claiming for loss or theft of personal belongings. If you don’t have proof of ownership, insurers may depreciate your item straight to its residual value. In some cases, your claim may be denied altogether.
Circumstances in which insurers will not pay a claim for lost or stolen items are known as exclusions. Typical exclusions in travel insurance policies include the following:
- If you don’t report the loss or theft within 24 hours and obtain a written police report
- If the loss or theft occurred while your belongings were checked in as cargo
- If it is a bicycle that was lost or stolen
- If the item was left behind at your accommodation after checking out or left on an aircraft ship, train, tram, taxi or bus
- If the item is a watercraft (except for surfboards)
- If the item was shipped unaccompanied as freight
- If the item was being cleaned, repaired or altered
- If the loss or theft resulted from wear and tear, deterioration, weather, insects, rodents or vermin
- If the item was left unsupervised
- If the item was left in a motor vehicle, unless locked away out of sight
- If the item was left overnight in a motor vehicle, even if locked away out of sight
- If the item suffered an electrical or mechanical breakdown
- If the item was brittle or fragile
- If you are entitled to compensation from another source
- If the item was sporting equipment being used at the time
- If the item was money, such as cash or cheques
As well as depreciation, the benefit you receive may also be affected by the excess payable.
An excess is the amount you pay towards a claim on a particular item. Whether an excess applies and how much it costs will depend on your policy.
There are normally two types of excess:
- Standard excess. Excess set by the insurer.
- Voluntary excess. Excess you can adjust up or down by paying a different premium.
When deciding on a voluntary excess, you should never opt for an amount you won’t be able to afford to pay when you claim, purely to receive a lower premium upfront.
A lower costing policy may not always be the best value
You should also look at the benefit paid after depreciation and the excess cost. If the excess is high and the benefit paid is low, you are not getting good value for money and should either consider paying to have the excess reduced or waived altogether.
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*The use of terms 'Best' and 'Top' are not product ratings and are subject to our disclaimer. You should consider seeking independent financial advice and consider your own personal financial circumstances when comparing travel insurance policies.