Depreciation
Depreciation refers to the reduction in value of an asset with age. This is applicable for such assets the value of which reduces over time and the reduction in value is equal to the depreciation the asset has encountered.
Calculation of Depreciation
We come across this term when we opt for a insurance cover for non-life assets. Lets, go through an example. Say, you have a refrigerator, the life span of which is considered 5 years. After 2 years of purchase, your refrigerator was damaged by a fire and you were cautious enough to opt for a insurance cover for the refrigerator. Today, the same make and model of the refrigerator is available at Rs.10000/-. Now the question is “How much will your insurer pay you for this loss”. Since the life of the refrigerator is 5 years, it is considered that the value of it reduces by 20%(100/5) every year. So, they will pay you Rs.6000/- i.e. 60%(100- 20*2) of the present market value.
One must always remember that the objective of insurance is protection and not profit making. Your insurer will only make good your loss and so they always consider depreciation while settling claims. This ensures that people don’t misuse their insurance cover.
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