With the passage of time, as your car creeps towards its retirement, its value will also diminish. An objective method to account for it is to weigh it in terms of wear and tear costs. Besides the anguish caused by sputtering lights, squeaky brakes and poor fuel economy, your ageing car might also leave a bigger hole in your pocket by virtue of this depreciation factor in your car insurance policy cover.
What is Zero Depreciation Cover?
The zero-depreciation cover provides for the cost of repairs for damages caused to the fibre, metal and rubber parts of the car without depreciation costs being deducted. This add-on can be included in a standard comprehensive/standalone own-damage policy and guarantees that wear and tear costs of the car are not deducted from the final claim settlement amount. A policy augmented with zero depreciation insurance cover is often known as bumper to bumper policy.
The absence of this cover will result in the reduction of the Insured Declared Value (IDV). This will adversely affect the price that the car will fetch in case of a sale and the amount that one will receive when compensation is sought from the insurer.
It is also important to note that a zero-depreciation cover will not cover batteries and tyres, engine damages caused due to fuel or water ingression, damages caused to gas kits, bi-fuel kit, consumables and for cases of mechanical breakdown of the car.
What is a Standard Comprehensive Cover?
The standard comprehensive policy offers coverage for eventualities such as theft, fire, etc. The full damage caused by or to third parties, riots, natural disasters etc. This policy only considers the current value of the car.
The below table offers a clearer picture of the two kinds of insurance covers –
| Criteria | Zero depreciation cover | Comprehensive policy cover |
|---|---|---|
| Subject matter/ cover | Provides for the cost of repairs for damages caused to the fibre, metal and rubber parts of the car without depreciation costs being deducted. | Offers coverage for eventualities such as theft, fire, damage caused by or to third parties, riot damage, arson or vandalism, natural disasters etc. |
| Claim amount | The full value of the claim amount will be paid. | Paid on the basis of the current market valuation adjusted for depreciation. |
| Premium amount | A higher premium ought to be paid. Usually 20 – 30% higher than a no-frills comprehensive cover. | Premium paid is comparatively lesser. |
| Limit on claims | Usually, a cap of 2 is placed for making claims. | No such limit exists. |
Depreciation factor – How to Calculate It?
This loss of endurance is calculated in the following manner –
| Age of the Vehicle | Percentage of depreciation for fixing Insured Declared Value (IDV) |
|---|---|
| ≤ 6 months | 5% |
| 6 months – 1 year | 15% |
| 1 year – 2 year | 20% |
| 2 year – 3 year | 30% |
| 3 year – 4 year | 40% |
| 4 year – 5 year | 50% |
To illustrate, here’s an example:
Your new i20 costs INR 5,00,000 when you purchase it from the showroom. Ten months later, the car has an IDV (factoring depreciation) of INR 4,25,000 and 2 years 3 months later, the car has an IDV of INR 3,50,000.
If the age of the car is more than 5 years, then the IDV depends on the age, model, make, the city it is registered at and the availability of spare parts.
Please note: Though the depreciation rates are standardised at a given moment of time, they may vary across time. One of the consequences of an increase in depreciation rates is lower premiums. So, do be vigilant about the same while purchasing the policy.
Also, the IRDA has assigned rates of depreciation for different parts which will be duly applied by the insured while calculating the final claim settlement. This too will be considered.
| Parts | Percentage deducted as depreciation |
|---|---|
| Wooden and metallic parts | 1st year – 5% 2nd year – 10% and so on |
| Fiberglass components | 30% |
| Plastic, nylon and rubber parts | 50% |
However, in the case of a zero-depreciation claim, the aforesaid calculations are inapplicable as the entire claim amount is paid for, which is rather significant.
Depreciation Remedy
In order to offset the losses caused due to depreciation of the car, insurers offer a medicine called zero depreciation cover. The way they do so is by providing full compensation for the damage suffered at the time of final settlement. This add-on cover comes at a very affordable price and enhances the coverage of the vehicle drastically. However, this depreciation remedy cannot be availed in case of total loss (for example, theft) and can be filed only a specific number of times in the entire claim period.
In Conclusion
The loss suffered due to depreciation can be a significant amount during the final settlement of claims. In order to hedge oneself against financial losses, a depreciation remedy is a good option – it assures a respectable amount and creates a better value for money. However, one must not blindly opt for such a policy by virtue of market trends and recommendations of insurance agents, as such a policy demands a higher price for a limited benefit. Effort must be made to assess its value on a case to case basis.
