• Depreciation Factor in Car Insurance

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    As per the Motor Vehicles Act, 1988, it is mandatory for every car owner in India to avail a suitable motor insurance for his/her vehicle. As per the law, one should insure the vehicle with a third-party liability cover at least. The rising number of vehicles on Indian roads has led to an increase in traffic as well. This, in turn, can lead to many vehicular accidents. Hence, it is vital that a person owning a vehicle avails a car insurance policy to financially safeguard oneself from unforeseen liabilities incurred as a result of a mishap.

    Types of depreciation covers

    Depreciation in car insurance is loss in the value of a vehicle as it ages. Due to the depreciation factor, a policyholder cannot receive the claim settlement in full. A part of the insured amount, pertaining to the deductibles and depreciation will be deducted during the claim settlement. Depreciation affects the vehicle and the vehicle parts. To get the claim settlement in full at the time of mishap, you can avail any of the below add-on covers/riders that the insurers have to offer today:

    • Zero Depreciation cover

    A zero depreciation cover, also known as nil depreciation cover or bumper to bumper cover, when availed, allows the policyholder to receive the claim settlement in full without deducting the value of depreciation on the car parts that have to be repaired or replaced after a mishap. This cover is especially useful for luxury car owners as this cover reduces the financial stress of the policyholder post a mishap by covering the expenses for replacing or repairing the car pats. You cannot avail this cover as a standalone policy, you will have to avail this with a base policy such as a comprehensive car insurance policy.

    • Comprehensive car insurance policy

    A comprehensive car insurance policy offers extensive coverage to the policyholder and covers the following:

    • Liabilities towards injuries to self
    • Liabilities towards damages to own vehicle
    • Liabilities towards injuries to the third-party involved in the mishap
    • Liabilities towards damages to the third-party vehicle involved in the mishap

    The difference between a comprehensive car insurance policy and a third-party liability cover is that, in the event of a mishap where the liabilities are more, having a comprehensive cover will be more beneficial than a zero depreciation cover.

    How the value of a car depreciates

    The value of any vehicle depreciates with time, as the vehicle ages the value of its parts reduces. In most cases, the insurers offer no salvage on car parts made of glass, rubber or plastic due to their quality and value depreciating with the age of the vehicle. The below given table represents the depreciation in the value of the car with respect to its age. Depreciation is taken into consideration by all the insurers when calculating the vehicle's IDV and determining the claim amount.

    Age of the vehicle Rate of depreciation
    Less than 6 months 5%
    Over 6 months but less than a year 15%
    Over 1 months but less than 2 years 20%
    Over 2 months but less than 3 years 30%
    Over 3 months but less than 4 years 40%
    Over 4 months but less than 5 years 50%

    Factors to consider for zero depreciation cover

    You should consider availing a zero depreciation cover based on the following factors:

    • Cost: Adding a zero depreciation cover to your car insurance policy will increase your insurance premium as well. A zero depreciation cover is costlier than a comprehensive cover because it offers claim settlement in full without considering the depreciation factor.
    • Number of claims: Insurers mostly have limited the number of claims to be made in a year to one. This has been implemented to demotivate people from raising small claims a number of times. While purchasing or renewing your motor insurance policy, get all the relevant details from the insurer, especially the number of claims you can make during your policy period. The higher the number of claims, the better it is for you.
    • Available for new cars: The zero depreciation cover is provided only to new cars or cars that are less than 5 years old. Paying more on insurance premium for cars older than 5 years is not a feasible option from the policyholder’s perspective.

    Also, ensure you do your own research and avail a car insurance policy that meets your insurance needs. Make sure to top-up the chosen base policy with appropriate add-on covers that will benefit you at the time of a mishap.

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