The Impact Of Depreciation On Car Insurance: What You Need To Know

Car insurance is something that all vehicle owners are familiar with. It is a mandatory and must-have protection against accidents, damages, or theft. But did you know that the value of your car decreases over time? This is called depreciation. Depreciation has a direct impact on car insurance, especially when it comes to claims and compensation. Here’s what you need to know about how depreciation affects your car insurance. 

What is Depreciation? 

Depreciation refers to the reduction in the value of an asset over time due to wear and tear, age, or usage. For cars, this means that the value of your vehicle starts dropping as soon as you drive it out of the showroom. Each year, the value of your car decreases, and this affects how much your car is worth when it comes to insurance.

For example, if you bought a new car for ₹10 Lakhs, after a year its value might drop to ₹8.5 Lakhs due to depreciation. The older the car gets, the more its value declines. 

How Does Depreciation Affect Car Insurance? 

Depreciation plays a key role in how much money you can claim from your insurance company in case of damage, theft, or total loss. When you file a claim, the insurer takes into account the depreciation of your car before calculating the settlement amount. 

1. Impact on Premiums

Depreciation doesn't directly affect the premiums you pay for car insurance, but the value of your car does. Since the value of your car drops over time, you may end up paying lower premiums for an older car. However, the compensation you would get in case of a mishap like an accident would also be lower. In some cases, older cars are more prone to repairs, which could lead to higher premiums in some cases.

2. Impact on Claim Amount

If your car is damaged and you make an insurance claim, the insurer will calculate the claim amount based on the current market value of your car. This is where depreciation plays a significant role. For example, if your car's bumper is damaged and needs replacement, the insurer won’t pay the entire cost of a new bumper. Instead, they will reduce the amount based on how much your car and its parts have depreciated over time. You will need to cover the remaining amount out of pocket.

3. Types of Coverage Affected by Depreciation   

• Third-party car insurance: This type of coverage is mandatory but doesn’t cover damages to your own vehicle. Depreciation doesn’t affect this type of policy since it only covers damage to other people or their property. 

• Comprehensive car insurance: Depreciation affects comprehensive policies because this coverage protects your own vehicle from damages caused by accidents, natural disasters, theft, and more. Since depreciation reduces the value of your car, it also reduces the compensation you can receive in case of a claim. 

Depreciation Rate in Car Insurance 

The rate of depreciation on different parts of a car is predetermined by insurance companies. Some parts depreciate faster than others. Here’s a general breakdown:

• Rubber, plastic, and nylon parts: 50% depreciation   

• Batteries: 50% depreciation   

• Fibreglass parts: 30% depreciation  

This means if your car’s plastic bumper is damaged in an accident, the insurer will only cover 50% of the replacement cost, and you will have to pay the rest. 

Similarly, depending on the age of your car, the depreciation value varies. Here’s how: 

After 5 years the value of your car continues to decline. Do note that the depreciation rates may change over time. Reach out to your insurer to get a complete understanding of the current depreciation rate.

How Can You Reduce Depreciation 

Fortunately, there are ways to reduce the impact of depreciation on your car insurance claims. Here’s a quick understanding of each: 

1. Zero Depreciation Cover

Zero depreciation cover is an add-on cover available with your car insurance policy. It ensures that the insurance company pays the full cost of repairs or replacements without considering depreciation. This means you won’t have to pay out of pocket for the depreciated parts like plastic or rubber. The insurer covers the full cost of parts’ replacement, as long as the damage is within the terms of the policy.

For example, if your car is damaged in an accident and requires a new bumper, the insurance company will pay the full price for the new bumper, without deducting depreciation.

However, zero depreciation cover typically comes with a higher premium, so you will need to weigh the extra cost against the benefit of full coverage.

2. Choose the Right Policy

It’s important to select a policy that suits your needs. If you have an older car, the impact of depreciation on your claims will be higher, and you may want to consider a zero depreciation add-on. On the other hand, if you are not too worried about minor repairs, a basic comprehensive policy may be enough.

3. Keep Your Car Well-maintained

Regular maintenance can help reduce the impact of depreciation on your car’s value. Well-maintained vehicles tend to have higher resale values, and insurers may consider this when evaluating your car for claims.

4. Claim Wisely

If you file claims for small costs often, you could lose your no-claim bonus (NCB), which is a discount offered by insurers for every claim-free year. Small claims are not worth losing this discount over, so consider paying out of pocket for minor repairs to keep your NCB intact. This way, you can save on premiums in the long run.

Depreciation for New Cars vs. Old Cars 

Depreciation hits new cars harder than older ones. A brand-new car can lose up to 20% of its value in the first year. After that, the rate of depreciation slows down, but it continues to drop each year.

For older cars, while the value continues to decrease, the depreciation rate is not as steep. This means that your insurance claim for an older car will still be lower, but the gap between the insured value and market value will be smaller than it would be for a new car.

Conclusion

Depreciation is a key factor to consider when getting car insurance or filing a claim. It reduces the value of your car over time and impacts the claim amount you receive. While this is an unavoidable aspect of car ownership, there are ways to protect yourself from depreciation-related losses. Opting for a zero depreciation cover, maintaining your car, and choosing the right insurance policy can all help minimise the impact.

Understanding how depreciation affects your car insurance can help you make informed decisions about your coverage. By knowing what to expect, you can better manage your car insurance costs and ensure you are adequately protected when it matters most. Check various insurance policies by simply visiting websites like www.bajajfinservmarkets.in and assess how the depreciation affects these.

(Articles under 'Fortune India Exchange' are either advertorials or advertisements. Fortune India's editorial team or journalists are not involved in writing or producing these pieces.)