Understanding Motorcycle Insurance Depreciation

Fast motion photo of a person riding a motorcycle

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.

What is motorcycle depreciation?

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.

What is the Insured Declared Value (IDV)?

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.

Why should you care so much about your IDV?

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:

A higher IDV means a higher premium but more money from your insurance company if something happens to your bike.
A lower IDV means a lower premium but less money from your insurance company if something happens to your ride.

It's essential to balance an affordable premium and adequate coverage. Choosing a low IDV to reduce bike insurance premiums can leave you underinsured.

How is declared value calculated (IDV)?

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:

New motorcycles (up to 6 months old): 5% depreciation
Motorcycles aged 6 months to 1 year: 15% depreciation
Motorcycles aged 1 year to 2 years: 20% depreciation
Motorcycles aged 2 years to 3 years: 30% depreciation
and so on...

What are the factors affecting insured declared value (IDV)?

Several factors can impact your IDV that help motorcycle insurance companies determine the current market value of the bike, including:

Location - Rates can vary based on where you live. For example, motorcycles in regions with year-round riding weather may experience faster depreciation due to increased wear and tear.
Market Demand - Market conditions and demand for specific or vintage models can affect their depreciation rates. Motorcycles in high demand or with limited availability may depreciate more slowly than those with lower demand.
Make and Model - Different makes and models of motorcycles depreciate at different rates. The brand's reputation and popularity can also play a role in depreciation.
The age of your vehicle - One of the most significant factors influencing IDV is the age of the motorcycle. As the bike ages, its market value depreciates.
Prior Incidents and Damage - Accident history (and the extent of damage) can affect market value and, consequently, its IDV, resulting in faster depreciation.
Accessories and Modifications - Any aftermarket accessories or modifications added to the bike can also affect its IDV. Some insurance companies may include the value of these additions in the IDV calculation for custom motorcycle insurance, while others may require additional coverage.

What is the significance of insured declared value (IDV)?

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:

Basis for Compensation: This includes scenarios such as theft, irreparable damage, or a vehicle declared a "total loss" by the insurer.
Coverage Adequacy: Policyholders can use the IDV to ensure sufficient coverage to replace or repair their vehicle in case of a significant loss.
Premium Calculation: Policyholders can choose an IDV that aligns with their budget and coverage needs, balancing affordability and protection.
Total Loss Compensation: An adequate IDV ensures that policyholders receive a fair reimbursement, helping them recover financially.

What is the impact of stating the wrong insured declared value (IDV)?

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:

Underinsurance: In the event of a total loss, such as theft or severe damage, your insurance payout will be limited to the declared IDV, leaving you to cover the difference out of your pocket. This can lead to significant financial expenses.
Premium Discrepancy: Providing a lower IDV than the actual value of your vehicle may result in lower insurance premiums, which might seem like a cost-saving strategy. However, this may be considered insurance fraud and is illegal. If the insurance company discovers the discrepancy, your policy may be voided, and you could face legal consequences.
Claim Rejection: If the insurance company determines that the IDV provided at the time of policy issuance was substantially lower than the motorcycle's actual value, they may reject your claim or reduce the payout to match the correct IDV.

When Does a Motorcycle Depreciate the Most?

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.

Why do some motorcycles depreciate more than others?

There are many reasons why some motorcycles depreciate more than others, for example:

Demand - If there’s a high demand for a particular make and model, it will depreciate at a slower rate.
Mileage - The more miles on the clock, the lower the value. A bike ridden hard with high mileage will depreciate faster than a bike with low mileage.
Condition - A well-maintained bike in great condition will hold its value better than one that hasn’t been looked after.
Rarity - If there’s a high demand for a particular make and model, it will depreciate slower.

When Does Depreciation Level Off?

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.

What Makes a Motorcycle Gain Value Over Time?

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.

Which Brands Depreciate the Fastest?

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.

How do you calculate depreciation on a motorcycle?

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.

Step 1: Determine the Original Cost of the Motorcycle

This is the price you paid for the motorcycle when you bought it.

Step 2: Estimate the Salvage Value

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.

Step 3: Determine the Useful Life

‘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.

Step 4: Calculate the Annual Depreciation

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.

How do you stop motorcycle depreciation?

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:

Low mileage

Ride your motorcycle responsibly and avoid unnecessary miles. Lower-mileage motorcycles tend to depreciate more slowly.

Ride responsibly

Avoid insurance incidents and damage by practicing safe riding habits. Staying incident-free can help preserve your motorcycle's value.

Use OEM parts

Use original equipment manufacturer (OEM) parts when making repairs or replacements. Using high-quality, genuine parts can help maintain the motorcycle's value.

Store properly

Store your motorcycle in a dry, sheltered, and secure location when not in use. Exposure to harsh weather conditions, sunlight, and moisture can accelerate depreciation.

Keep your bike clean

Clean your motorcycle regularly to prevent dirt, grime, and corrosion from accumulating. Proper cleaning and detailing can help maintain the bike's appearance.

Document maintenance

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.

Invest in maintenance and repairs

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.

Depreciation for motorcycle insurance

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.

Understanding Depreciation for Motorcycle Insurance