Like any other vehicle or asset, a motorcycle has its fair share of responsibilities, including insurance-related decisions.
It's essential to understand the various factors that can affect your motorcycle insurance policy, and one key element that plays a significant role is the depreciation rate.
Depreciation refers to the drop in the value of your motorcycle over time. It happens to everything - your phone, your laptop, and, yes, your bike.
Many factors are used to calculate this and determine the motorcycle's actual cash value. As your motorcycle gets older, collects more miles, and newer, shinier models come out, its value decreases.
Wear and tear is one of the biggest things you need to consider when it comes to understanding the depreciation value of your ride.
But here’s the kicker: this decrease in value can impact how much money you’ll receive if you need to make an insurance claim.
That’s why it’s essential to understand depreciation and how it plays into your two-wheeler insurance coverage.
Next up on the list of insurance terminology is insured declared value.
IDV represents the maximum amount your motorcycle insurance company will pay in case of a total loss of the insured motorcycle.
It is the sum that you declare when purchasing the insurance policy, and it is based on the bike's manufacturer's listed selling price (plus the cost of accessories, if any) minus depreciation. Harley-Davidson Insurance Services does not offer a declared value feature.
Well, your IDV directly affects the premium you pay for your insurance.
It represents the maximum amount the insurance company will pay for a total loss, such as theft or irreparable damage. Ensuring that your IDV is appropriate is crucial to having sufficient coverage. If your IDV is too low, you may not receive enough compensation for a total loss.
IDV also affects the premium calculation:
It's essential to balance an affordable premium and adequate coverage. Choosing a low IDV to reduce bike insurance premiums can leave you underinsured.
IDV is calculated based on the manufacturer's listed selling price of the vehicle minus depreciation - which is the significant factor in determining IDV.
The general formula for IDV calculation is as follows:
IDV = (Manufacturer's Listed Selling Price - Depreciation) + (Value of Accessories)
Depreciation is deducted based on the age of the motorcycle. Below is a sample of how an insurance company might break down depreciation percentages:
Several factors can impact your IDV that help motorcycle insurance companies determine the current market value of the bike, including:
An accurate IDV helps balance the premiums you pay and the compensation you receive. As a result, it is a crucial concept for policyholders and motorcycle insurance companies.
Here are four key reasons why IDV is significant:
Stating the wrong IDV can have some not-so-great consequences, both for the policyholder and the insurance company.
Here are three of the significant impacts of providing inaccurate IDV information:
Motorcycles depreciate the most during the first few years after purchase. When you roll your new bike out of the dealership, its value typically drops.
The first two years are estimated to be the years with the highest rate of depreciation.1
After that, the depreciation rate slows, but the value will still decrease over time.
There are many reasons why some motorcycles depreciate more than others, for example:
It's essential to note that the point at which depreciation levels off is not a fixed rule and can vary widely from one motorcycle to another. Factors discussed above, market conditions, economic trends, and overall motorcycle demand can influence depreciation rates.
Depreciation tends to level off after the motorcycle is about five years old.
By this point, the most significant drops in value have already occurred, and the depreciation rate slows down considerably. However, this can vary based on the make and model of the motorcycle.
While most motorcycles depreciate over time, there are a few exceptions that can increase in value:
Limited edition models - Motorcycles produced in limited quantities or special editions can become collectible and increase in value over time.
Vintage motorcycles - Older motorcycles, especially rare or in excellent condition, can appreciate as they become more desirable to collectors.
Iconic models - Motorcycles that have a cult following or are considered iconic can also increase in value.
Brands that are less well-known or have a reputation for lower quality tend to depreciate the fastest.
Also, motorcycles from brands with a history of reliability issues or recalls can depreciate faster.
Remember that this can vary based on the location and demand for specific brands and models.
The depreciation of a motorcycle or any other asset can be calculated using several methods.
The most common methods are straight-line depreciation, declining balance, and sum-of-the-years digits. For motorcycles, the straight-line method is the most straightforward and commonly used.
This is the price you paid for the motorcycle when you bought it.
The salvage value is what you think the motorcycle will be worth when you're ready to sell at the end of its life. For simplicity, the salvage value might be set to $0.
‘Useful life’ refers to how long the motorcycle might be in use before it reaches the end of its functional life. A typical useful life might range between 3 to 10 years for personal motorcycles, depending on various factors, including make, model, usage, and proper maintenance.
Armed with this information, you can figure out the depreciation for your motorcycle. Here’s a standard formula used:
Annual Depreciation = (Original Cost - Salvage Value) / Useful Life
For example, if you bought a motorcycle for $10,000 and expect its salvage value to be $1,000 after 10 years, the annual depreciation would be:
($10,000 - $1,000) / 10 = $900
So, using the straight-line method, your motorcycle would lose $900 in value each year. Remember, this is a simplified example, and other factors might affect the actual depreciation of a motorcycle in real-world scenarios.
It is also important to note that motorcycle insurance companies may use their own depreciation tables or methods to calculate depreciation. It's advisable to consult your insurance policy wording or contact your insurance provider for specific information on how they calculate depreciation for your motorcycle in the event of a claim.
While you cannot wholly eliminate motorcycle depreciation, you can take steps to minimize it and preserve the value of your motorcycle as much as possible.
Here are some strategies to help you stop or reduce motorcycle depreciation:
Ride your motorcycle responsibly and avoid unnecessary miles. Lower-mileage motorcycles tend to depreciate more slowly.
Avoid insurance incidents and damage by practicing safe riding habits. Staying incident-free can help preserve your motorcycle's value.
Use original equipment manufacturer (OEM) parts when making repairs or replacements. Using high-quality, genuine parts can help maintain the motorcycle's value.
Clean your motorcycle regularly to prevent dirt, grime, and corrosion from accumulating. Proper cleaning and detailing can help maintain the bike's appearance.
Keeping detailed records of all regular maintenance and the cost of repairs will show potential buyers that you’ve taken good care of your motorcycle, which can help preserve its value.
Don't postpone necessary repairs or maintenance tasks. Addressing issues promptly can prevent them from escalating and causing more significant depreciation.
Follow the manufacturer's recommended routine maintenance schedule and address any issues as soon as they arise.
Considering depreciation is essential when buying a motorcycle or any other valuable asset.
While it's impossible to stop depreciation entirely, understanding how it works and what factors affect it can help you make informed decisions and preserve the value of your motorcycle as much as possible.