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Depreciation in Car Insurance

By Finserv MARKETS - Dec 31,2019
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Vehicle Depreciation

To usher in the New Year, Anil bought himself a brand new Maruti Swift car that he had been eyeing for quite a long time. The shiny red car was fully accessorized with a state of the art music system, air conditioner and comfortable seats. However, when he searched for car insurance online to find an appropriate policy for his expensive vehicle, Anil was shocked. He learned the car’s value had already depreciated within 15 days of being on the road.

The insurance company offered him 95% of the car’s market price as the insured declared value (IDV). This meant that the vehicle was undervalued by 5 % due to depreciation. Many first time car owners like Anil are often stunned to know their brand new vehicles have already lost some of their IDV by the time they’ve purchased it.

Here we explain IDV and how it affects your car insurance

What is Insured declared Value or IDV?

IDV is the maximum sum assured which is fixed by the insurer when you buy a car insurance. The amount is based upon the ex-showroom price of the car. The insurer pays this amount to the car owner in case of theft or damage to the vehicle. One has to pay a higher premium to get a higher IDV.

There is a standard formula which is used to calculate IDV in India. It is calculated using the following formula:

IDV = (Ex-showroom price-Depreciation of car) + (Vehicle Accessories Cost-Depreciation of these items)

So, if you bought a car for Rs 5 lacs, it would depreciate by 5% i.e. Rs 25,000. And thus, its IDV would be Rs. 4.95 lacs (5 lacs -25,000).

How much does a car’s value depreciate?

A car’s value is dependent upon its age. The depreciation percentage increases every year the car is used. It loses over 20% of its actual value after the first year of being bought. The value further decreases by 10% each year annually. Cars older than five years have a 50% depreciation rate. For instance, a three year old car’s value depreciates by 30%. So a Rs 5 lac car’s value after three years would be Rs 3.5 lacs.

Here’s a handy table of the depreciation percentage of the car against its age to help you understand better:

Age of the car Percentage depreciation for IDV calculator
Less than 6 months 5%
More than 6 months but not above 1 year 15%
More than 1 year but not above 2 years 20%
More than 2 years but not above 3 years 30%
More than 3 years but not above 4 years 40%
More than 4 years but not above 5 years 50%

In case this car is stolen or damaged, the insurer would pay the car owner an amount which is maximum of Rs 3.5 lacs of the insurance policy.

Zero depreciation car insurance – To ensure the car owners are fully reimbursed for their damaged or stolen vehicles, there are many zero depreciation car insurance policies available. You can opt for the comprehensive Car Insurance policy on Finserv MARKETS which offers a zero depreciation cover. You can also check the premiums for car insurance plans available on Finserv MARKETS by using the car insurance calculator. The tool not only provides a quote but also allows you to compare quotes offered by insurers in India. Based on the results, you can then choose a car insurance plan that is affordable and fulfils your needs.

Under a zero depreciation car insurance policy, the car is insured at its market value. In case of loss, the owner is paid the full claim amount without the deduction of the existing depreciation rate. While some policies offer zero depreciation policy on new cars only, some insurers provide 100% replacement cost in the first year only. It should be borne in mind that zero depreciation policies generally come with a higher premium.

Thus, if Anil’s car gets damaged in an accident and he has opted for a zero depreciation policy, the insurer will reimburse him the actual cost borne by him on repairing the car. There would be no depreciation deduction.

Proposal to make invoice price as IDV – The Insurance and Regulatory Development Authority (IRDAI) has proposed to make the invoice or on road price of the car as the IDV. This means a car’s IDV would include its ex-showroom price, cost of manufacturer’s accessories and registration cost. Moreover, no depreciation rate will be deducted from the IDV for first three years of a new car. This would be beneficial for the car owners.

Till the time IRDA’s proposal is implemented, having a zero depreciation car insurance policy is a wise option. You can opt for a Car Insurance policy from Finserv MARKETS which, along with a zero depreciation cover, comes with several perks like 24X7 assistance, access to a pan Indian network of 4000+ garages, minimum documentation needed and much more!

To know more on car insurance in depth, you can check out these blogs:

Finserv MARKETS, a subsidiary of Bajaj Finserv, is a one-stop digital marketplace that has been created for consumers on the go. It offers 500+ financial and lifestyle products, all at one place. At Finserv MARKETS, we understand that every individual is different. And that’s why we have invested in creating a proposition – Offers You Value. A value proposition that ensures you get offers which are tailor made for you. We also offer an amazing product range and unique set of online offers across Loans, Insurance, Investment, Payments and an exclusive EMI store. Be it in helping you achieve your financial life goals or offering you the latest gadgets, we strive to offer what you are looking for. From simple and fast loan application processes to seamless and hassle-free claim-settlements, from no cost EMIs to 4 hours product delivery, we work towards fulfilling all your personal and financial needs. What’s more! Now enjoy the same benefits in just one click with our Finserv MARKETS App.

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522