The decrease in your car’s market value with time is called depreciation. Luxury cars are one of the fastest depreciating equipment in the market. This is because of the wear and tear these vehicles go through naturally over years of use. Car insurance companies factor in the depreciation of your car when calculating the IDV and provide you with compensation equal to the current market value of your car. Here’s how insurers calculate depreciation in insurance with respect to the age of the vehicle:
|Age of the Car||Percentage of Depreciation|
|Less than 6 months||0%|
|Less than 1 year but more than 6 months||5%|
|Less than 2 years but more than 1 year||10%|
|Less than 3 years but more than 2 years||15%|
|Less than 4 years but more than 3 years||25%|
|Less than 5 years but more than 4 years||35%|
|Less than 10 years but more than 5 years||40%|
|More than 10 years||50%|
Depreciation in insurance is not only applicable to the entire car but also to its individual components. Here is how depreciation affects the market value of your car parts:
|Component type||Percentage of Depreciation|
|Parts made of glass||0%|
|Parts made of Fibreglass||30%|
|Paint of the car||50%|
|Parts made of rubber, nylon, or plastic||50%|
How does depreciation impact the IDV of your car insurance policy?
IDV is the maximum compensation that the motor insurer will provide you to repair the damages incurred to your vehicle due to an accident. The more the age of your car, the lesser is the IDV offered by the insurance company.
Let’s understand this with an example: Suppose you buy a brand–new car for Rs 14 lakh in 2022. After 1 year, the market value of that car in the eyes of the car insurer would probably be Rs 12,60,000 due to a 10% rate of depreciation. Hence, if your car is declared as total loss in the second year of its purchase, you can only receive a maximum claim amount of around Rs 12,60,000 from your insurer. This will result in an overall loss of Rs 1,40,000.
A lower IDV has two outcomes. First, you do not get the adequate insurance coverage and second, you get to pay a lower premium. While a lower premium might sound beneficial, it is quite the opposite in reality. This is because you would later need to spend the money you saved on your car insurance premium while getting your car repaired after an accident.
The best way to prevent the insurer from factoring in the depreciation of your car’s value is to buy the zero–depreciation add–on with your comprehensive car insurance policy. This will help you receive compensation from the insurance company that is equal to the current market value of your car. It is essential to remember that including riders in your insurance policy will marginally increase your insurance premium. However, this amount would still be lesser than what you would need to pay to get your car repaired after an accident if you do not have adequate insurance coverage.
Disclaimer: The above information is indicative in nature. For more details on the risk factor, terms and conditions, please refer to the Sales Brochure and Policy Wordings carefully before concluding a sale.