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Does Zero Depreciation Promote Careless Driving?

By Vikas Chandra Das
21 July 2022, 11:46 AM

Your car, like all other machines, will suffer from the vagaries of time and undergo some wear and tear. A standard insurance policy refuses to offer protection for this depreciation of the value of your beloved possession. However, like most other things, this too can be bought for a price – a zero depreciation add-on for a higher policy premium.

What is Zero Depreciation?

Zero depreciation is an add-on that entitles the insured to seek the entire expenses incurred while replacing the damaged parts of your automobile. This add-on guarantees that the wear and tear costs of the car are not deducted from the final claim settlement amount. This policy is also termed as “Nil depreciation policy”.

The IRDA has assigned rates of depreciation for different parts which will be duly applied by the insured while calculating the final claim settlement.

PartsPercentage deducted as depreciation
Wooden and metallic parts

1st year – 5%

2nd year – 10% and so on

Fiberglass components30%
Plastic, nylon and rubber parts50%

The above figures are solely depicted to illustrate that all of this amount mentioned above (nearly 50% of your claim amount) will be saved if a zero-depreciation add-on is opted for by the insured.

The purchase of zero depreciation will entail the following –

  • A higher premium (of an additional 20 – 30% approx.) must be paid by the policyholder;
  • There will be an upper limit to the number of claims that can be made in a year;
  • Out of pocket expenses of the insured are drastically reduced. However, the insured will have to make payments on the following as they are not covered in zero depreciation add-on -
    • Engine damages caused due to fuel or water ingression;
    • Batteries and tyres;
    • Gas kits, bi-fuel kit, consumables, and mechanical breakdown of the car

How does a Zero-depreciation Cover Impact the Owner?

A zero-depreciation cover is said to trigger a behavioral change in the driving habits of the insured as they are assured that the car will be in its financial prime no matter what. Caution is blown to the wind since they tend to get more experimental in the presence of a protective cocoon – breaking speed limits, driving negligently, etc all seem a lot less harmful in the presence of this add-on cover. In fact, this trend has been validated through feedback research conducted across insurance companies.

However, for all those who feel that this is a valid point, just keep in mind that the No claim bonus available at the end of the term will be lost in case such an insurance claim is made. This must be incentive enough to prevent one from loosening their grip over the wheel or driving carelessly.

Car Insurance Only Covers Legal Accidents

The insurer’s liability extends to only legal liabilities, such as accidental damages, property damage, and death/bodily injury, that have been legally recognised as per law and more importantly, the insurance contract. To illustrate, uninsured peril will not be covered by the car insurance company. Another example is zero liability of the insurer in cases where damages caused were a product of drunk driving or driving in the absence of a valid license.

Pros and Cons of Zero Depreciation Cover

Enhances coverage and secures the automobile more holistically.The premium amount is higher than other car insurance policies.
Full compensation for the damage suffered at the time of final settlement.There is a cap on the number of claims that can be filed in a year.
Protects hard-earned add-on money of the insured.Covers only up to a period of 5 years.
 It does not cover the car in case of total loss such as theft.
 The add-on is expensive when compared to other add- ons. 

Who Should Get this Cover?

Experts recommend the following car owners to purchase this insurance policy –

  • Persons who have newly purchased the car;
  • Inexperienced drivers (as the probability of them meeting with an accident is significantly greater);
  • Persons residing in accident-prone or high-risk localities or those who are frequent in those areas;
  • Persons who are finicky about even small scratches on their cars;
  • Persons who own high maintenance, luxury cars with expensive spare parts.

It is important that one must consider the age of the car, the premium amount, the limit on claims, and compulsory deductibles before purchasing such a policy.

To sum it up!

The trade-off between paying a little extra premium once in a while appears to be a better deal than shelling significant repair costs in case of an accident or severe damage to the car. However, each individual policyholder must weigh the costs and benefits associated with a zero-depreciation cover vis-à-vis other policies to determine whether this is of value or not.

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