What is Zero Depreciation Insurance and How It Differs From Comprehensive Car Insurance
Confused by the term Zero Depreciation and want to know what Zero Depreciation Insurance means? Read this article to understand in detail what this type of insurance means and why is it better than the alternatives.
The value of an asset doesn't stay the same with passing time. Assets such as a plot of land or a bar of gold usually appreciate. However, a car or machinery loses its value over time. This is known as depreciation. Anyone involved in business would know that the law allows businesses to apply depreciation on the assets they report. Another area where depreciation is relevant is insurance. When you claim car insurance against your two-wheeler or four-wheeler, the settlement is made on the depreciated value of the vehicle rather than its replacement value. The older the vehicle, the higher would be the depreciation and the lower would be its depreciated value.
Zero depreciation Insurance
A zero depreciation insurance policy is a comprehensive car insurance policy which includes the zero-depreciation add-on cover. In a normal insurance cover claim, settlement is made on the depreciated value of the vehicle's part. However, in a zero-depreciation policy, the depreciation is not deducted, and as a result, you get a higher claim settlement. The settlement is made for the entire Insured Declared Value (IDV) of the vehicle.
As you purchase the zero-depreciation add-on, your premium amount will be higher than a regular policy.
How does depreciation work in vehicle insurance?
A car or a two-wheeler is insured for the IDV. IDV is the price of the car as adjusted after considering the depreciation of the vehicle. When a claim is made against the policy, the IDV of the vehicle gets adjusted with the depreciation rates specific to the part(s) replaced. The Insurance Regulatory and Development Authority of India (IRDAI) specifies the depreciation rates for various parts of a vehicle. The same is:
Because of these depreciation deductions, the policyholder gets a lower amount than the cost involved and the proportionate IDV value.
Zero depreciation insurance and comprehensive car insurance
Comprehensive car insurance is essential coverage that protects you from both third-party and own damage. Zero depreciation insurance further safeguards your finances by ensuring that you get more out of your motor insurance claim. Here are the major differences between a comprehensive car insurance policy and a policy with a zero-depreciation add-on.
Settlement – In a zero-depreciation policy, the claim settlement amount is higher as the depreciation of the replaced part(s) is not deducted from the settlement amount. When a claim is raised against damages under a comprehensive car insurance policy, the depreciation of all the parts that are being replaced is considered. This results in the release of a reduced settlement amount by the insurer.
Claim limitation – In many zero-depreciation insurance policies, there is a limitation on the number of claims you can raise in a year. Option may be available to select the number of claims or an unlimited claim option for the policy period. However, the premium will vary accordingly. A comprehensive insurance policy, on the other hand, doesn't have a specific limit on the number of claims that can be raised during the policy period.
The age limitation of the car – Zero depreciation add-on cannot be purchased for a car older than five years. There is no such limitation in the case of a comprehensive car insurance policy. In very old cars, the very low IDV and the condition of the car may make it difficult or unworthy to get a comprehensive policy. In such cases, people may opt for mandatory third-party insurance only.
Premium amount – The premium amount in case of zero-depreciation insurance is a little higher than a regular comprehensive policy. The exact hike in premium due to the zero-depreciation add-on would vary on a case-to-case basis. However, the generally zero-depreciation cover comes at an additional cost of around 15-20% of the standard premium amount.
Plastic parts – If you have a zero-depreciation add on your car insurance policy, no depreciation will be considered in the repair and replacement of plastic parts. However, repairing plastic parts attracts a 50% depreciation in the case of comprehensive car insurance policies.
Suitability – A zero-depreciation cover is suitable in the case of cars that are brand new, have expensive parts or the car itself is very expensive. New or inexperienced drivers can opt for it and so can car owners driving in places with high accidents, poor driving conditions, bad parking conditions etc. A comprehensive policy is suitable for any policyholder who wants to protect themselves from any repair costs arising out of their cars. While third-party insurance protects you from damages you cause to the third-party, comprehensive is the essential protection for the damages that occur to your vehicle.
If you are interested in keeping your expenses low when it comes to a damage repair to your car, a zero depreciation insurance policy is the safest bet.