For any kind of property, its depreciation is a natural process that leads to the decrease of its value. It is due to normal wear and tear of the asset, and the same rule applies to the car also. Over a period, a car’s value also goes down due to its depreciation. Hence for a car owner, it is necessary to know how the depreciation affects his vehicle and its insurance premium.
It is a fact that the car insurance is offered to save the owner from damage to the car for which he may have to pay a considerable amount. In case of a total loss of the car, one can have the maximum amount availed from the insurer. And this amount is called as the insurance declared value or IDV. The biggest question here is how to fix the IDV. In this regard, one has to take the depreciation value of the car into account and accordingly find the right IDV of his car. The rule that applies here is- the older the car, the more is its depreciation and less is the value of the car.
How it affects the premium of the car?
While going for the insurance, one has to pay a premium to the insurer. The amount of premium is determined by a number of factors among which one important factor is the value of the car. For the first six months of a new car, the depreciation rate is 5%, and later it increases with time. Hence, when one asks for a quote from an insurance company, the age of the car is checked, and the respective percentage of depreciation is deducted to reach the value of the car or IDV. According to the IDV, the premium for the concerned insurance is decided. Hence one can say that the premium of the car and depreciation has direct co-relation where they impact each other.
Applicability of depreciation
The depreciation applies to various parts of the car at different rates. Usually, it does not apply to the glass parts while for the rubber parts it is 50 per cent. For the tyres as well as the tubes and batteries also the same rate of depreciation is applicable as rubber parts. For the parts made from fibre, the rate is 30 per cent.
How to save the sum insured from depreciation rate?
In the present age, there are also insurers who offer zero depreciation and depreciation shield along with their plans. It can help one save the sum insured from the effects of depreciation. It means if the buyer opts for this add-on, he can protect the sum insured; hence in case of loss of the car; he can have a better value available as a part of the claim.
However, there are many factors one needs to take into account before going for the zero depreciation. The foremost important point is the premium of The Insurance Plan. It gets increased with the choice of the option of zero depreciation. Hence the price for the comprehensive policy can also be higher. One also needs to check if there is any limit of making claims to the insurer after opting for this add-on as usually, the service providers set some limits for the claim.
The benefit of zero depreciation is available for the new car only. If the car is five years or more old, one cannot opt for this option. Usually, the risk of damage due to accident or theft lies more for a new vehicle than an old one. Hence the option of zero depreciation is offered to the new vehicle owners only. If one has to suffer from theft or accident due to others fault, this add-on can protect his sum insured. Hence these are some factors that can help one know the relation of depreciation and policy premium.