What term describes the loss of value due to wear, tear, age, or obsolescence?

The term that describes the loss of value due to wear, tear, age, or obsolescence is depreciation. Depreciation is an accounting concept that reflects the reduction in the value of an asset over time, typically due to normal use and aging. It is significant in insurance as it affects the payout when a claim is settled or a property is valued.

For example, vehicles and equipment depreciate as they are used, and their market value diminishes over time. Insurance adjusters consider depreciation to accurately assess the current value of a property at the time of a loss. This understanding helps ensure that policyholders receive a fair settlement based on the actual worth of the damaged or lost property, rather than its original purchase price.

In contrast, valuation refers to determining the worth of an asset but does not inherently account for loss of value over time. Replacement cost indicates the amount needed to replace an asset with a new one of similar kind and quality, without factoring in depreciation. Stated value is a method of appraising property for insurance, where a specific value is agreed upon in the policy, but it does not directly address the concepts of wear, tear, or obsolescence.