A car is a one-time and a significant investment for most of us. Protecting this asset is essential. With a notable position in society, it comes with its convenience and travelling facilities. Car insurance is needed to protect your car from any damage or loss caused to it due to any accidental uncertainty.
However, just as almost every asset loses its value over time, a car and its parts depreciate too. We can secure the damage caused to the car with the help of insurance, but depreciation is natural.
Standard 4 wheeler car insurance does not include coverage for car depreciation. However, there are still some ways to counter the effect of depreciation on the car insurance policy. Let us learn the techniques to reduce its influence on insurance coverage.
What is Depreciation in Car Insurance?
Depreciation of a car means a reduction in the value of the car and its parts due to wear and tear that happens with time. In the context of insurance, the depreciation of a car is a vital factor that decides the coverage of cost loss that the insurance company can provide.
Insurance companies determine the condition and efficiency of your four-wheeler while you purchase a car insurance policy as it plays a crucial role in determining claim settlements of your four-wheeler.
Elements that Affect Depreciation Rate of Car
Since car depreciation forms an important part of insurance policy claims and coverage, it is essential to have an idea of what elements are the reason behind it.
Here are the 3 reasons why your four-wheeler depreciates in value:
- Wear and tear of car engines with usage and other factors like improper servicing, running on less fuel, etc.
- Lower maintenance and damages due to improper driving.
- Model upgrades and newer versions of the car make the older model obsolete.
To reduce the depreciation rate, these factors can be focused on to the extent controllable.
Calculation of Car Depreciation Rate
Calculation of car depreciation takes place while calculating the insurance premium cost and its insurance declared value. The rate of depreciation can be calculated with the help of calculating the cost of its life or with the help of the salvage value of the car. It can be calculated yearly or monthly as per the policies of the insurance provider.
The two primary methods used for calculating car depreciation rates in insurance policies are:
- Cost method
This method considers the original cost of the car. The insurer calculates the depreciation based on the purchase price, and as the car ages, this cost diminishes, impacting the IDV.
Depreciation Amount = Cost of running a car X Years of owning car X100/Effective running years of car
- Written Down Value Method
A written down value or diminishing cost value considers the salvage value of the car for calculation of the depreciation. With that, it considers the market rate of depreciation.
Depreciation Amount = (Cost of running a car – Salvage Value of Car) x Rate of Depreciation
Impact of Depreciation in Car Insurance Policy
Calculation of IDV
Insurance Declared Value of the Car = Original Price of the car – Appropriate Depreciated Amount.
While calculating the insurance declared value or coverage amount, the depreciation is taken into account. The higher the depreciation value, the lesser the insurance coverage provided by the car insurance policy provider.
Determining Insurance Premium
While determining the cost of insurance premiums, the age of the car is considered. Some insurance companies calculate the premium amount by looking at the condition and saleable value of the car. Generally, if the car insurance depreciation is more, the insurance premium will be higher
How to Reduce the Depreciation Impact?
Though the depreciation impacts the four-wheeler insurance policy there is also a way out to reduce its impact on the insurance coverage amount. Let us know about it:
Zero Depreciation Cover in Car Insurance
The zero depreciation add-on cover or bumper to bumper car insurance is the way to reduce the influence of depreciation on car insurance.
It mitigates the impact of depreciation by providing extra insurance coverage during insurance claim settlements. It ensures that the insured receives the full value of replaced car parts without considering the depreciation.
Choosing the Right Coverage
Opting for a comprehensive car insurance policy that aligns with specific needs and the damage caused to the car or its parts will help.
The insurance claim will provide the whole amount as agreed by the insurance provider in case of any damage caused. It is also important to check the terms and conditions of insurance before purchasing it.
Conclusion
In a nutshell, depreciation plays an essential role in car insurance policies. It influences premium costs and Insurance Declared Value(IDV). As the car ages, its value decreases, leading to potentially higher premiums and lower coverage.
However, car owners can mitigate the effect of depreciation on their insurance policies by considering options like zero depreciation add-on covers. These add-ons help you as they ensure that depreciation is not considered during the claim settlement, allowing you to enjoy comprehensive coverage.
