Buying car insurance can seem complicated as you come across several terms you may not have heard of before. Therefore, before buying a car insurance policy, try to understand these terms and their impact on the policy. IDV or the insured declared value, is a concept you must know before paying for your car insurance policy.
IDV is the maximum amount you can receive from your insurance provider if your asset suffers significant damages and is now beyond repair. Generally, the insured declared value and its conditions are stated on the asset’s insurance policy documents. However, you must ask your provider to help you with the details.
The IDV is the asset’s perceived value for the owner. It might be equal to or less than the price at which the owner purchases the asset. An owner needs to declare the IDV, which will be included in the policy. Based on the IDV given by the asset owner, the insurance company decides the premium amount for the car insurance policy. Therefore, the higher IDV you give, the costlier your premiums will be.
IDV in Car Insurance
IDVs are pretty relevant in the universe of car insurance. In simple terms, the car's market value is considered the IDV. The IDV sets a benchmark for the maximum amount you can receive as claims for damages. The IDV changes based on any applicable depreciation. The age of the car and the regular wear and tear cause depreciation. Hence, you must consider the rate of depreciation on cards while declaring an IDV.
You only receive an amount equivalent to IDV if your car gets stolen or it has suffered damages due to an accident, or human or natural disasters. Do note that the cost of your premiums is directly dependent on the IDV. Hence, the higher the IDV of the car, the higher will be the premium amount.
Depreciation in IDV
As discussed earlier, as soon as your car leaves the showroom, it attracts depreciation. Therefore, you must factor in the depreciation rate before calculating the IDV. According to the Motor Tariff Act, the following rates of depreciation apply to cars:
| The Age of the Car | Rate of Depreciation |
| < 6 months | 5% |
| Six months to 1 year | 15% |
| 1 to 2 years | 20% |
| 2-3 years | 30% |
| 3-4 years | 40% |
| 4-5 years | 50% |
| >5 years | Negotiable |
In most cases, if you are getting a car older than five years insured, the IDV will be decided after the physical verification of the car. The insurer and the policyholder can mutually discuss the IDV of such a car.
Calculation of IDV
When you buy a new car, the IDV is decided based on the car's selling price. However, you need to consider depreciation for calculating the IDV for any car. You can use the following formula for calculating the IDV:
Car with Accessories
If you get your car insured along with the accessories, the IDV will be calculated as follows:
IDV = (Selling price by the manufacturer – cost of depreciation) + (cost of the accessories – cost of depreciation of these accessories)
Car without Accessories
In case you want to insure the car without any added accessories, the value of the IDV will be:
IDV = selling price by the manufacturer–cost of depreciation
Points to Remember for IDV Calculation
You should stick to certain stuff while ascertaining the IDV of the car. These will help you when you make a claim:
Don’t Understate
Some people tend to reduce the IDV to reduce the cost of their premiums or to get a discount on the car insurance policy. While the discount will give you short-term financial relief, it will become a nightmare if someone steals your car or if the car suffers damages. To ensure you get a fair claim amount in an unforeseen circumstance, state the car's actual value.
Don’t Overstate
A few people are too fearful of the future. They might spend a lot on premiums in the hope that they might receive a greater claim value if something unexpected happens to the car. Also, a higher IDV will increase your premiums, but that might not guarantee a higher claim amount. This is because, along with the IDV, several other factors are also considered while calculating the claim amount.
Cross-check Your Calculation
Before you submit the IDV, make sure that you calculate the IDV again and cross-verify it. If you provide an inaccurate IDV, it will impact your claims significantly.
You must stick to all the points listed above to pay fair premiums and get a claim that covers the cost of damages if need be.
Read more - Why Is It Important to Set the Correct IDV While Renewing Your Car Insurance?
Advantages and Disadvantages of Decreasing Car’s IDV
The IDV and the premium amount are co-dependent. Hence, if the IDV increases, the premiums also increase. Let’s look at some advantages and disadvantages of decreasing the car’s IDV.
Advantages
- The premium amount will be lesser than the regular amount payable.
- You can use the residual amount on car maintenance and the regular upkeep of the car.
Disadvantages
- The insurance sum decreases, which impacts the claim amount negatively. Hence, you might get a lower amount as an insurance claim.
- You will have to bear the additional expenses, which might be a lot more than the value of the discount you receive on the premiums.
As the disadvantages outweigh the advantages, you must try to avoid decreasing the car’s actual IDV for a discount on premiums.
Read more - Does It Make Sense To Increase Your Car’s IDV?
