When buying or renewing a car insurance policy, you may often come across the term depreciation. Understanding depreciation and how it impacts your car insurance can help you make more informed decisions.

Here’s a detailed look at how depreciation affects your car insurance policy and how you can minimize its impact

What is Depreciation in Car Insurance?

Depreciation affects your car insurance premium because premiums are calculated based on the value of your car. As the value of your car decreases, the premium would be lowered as well. When you lodge an insurance claim for your vehicle, you will receive a lower amount than your car's original purchase price because the insurance company reduces depreciation from the claim amount. You can opt for an add-on called zero depreciation in car insurance to minimize the impact of depreciation on your car.

Factors That Affect the Car Depreciation Rate

Every car depreciates over time due to natural wear and tear. However, the depreciation rate depends on several factors, as described below.

Age

The age of your car significantly affects its depreciation rate. The more you use your car, the more it depreciates. As the car ages, its value tends to decrease faster.

Number of Kilometers Driven

Your car's depreciation rate also depends on the number of kilometers traveled using your car. A car that has not been driven much is valued higher.

Car Model and Make

The model and make of your car affect the depreciation considered by your insurance company. Some car manufacturers are reputed in the market for making sturdy and high-quality vehicles, while others are known for their poor-quality vehicles.

Fuel Type

The depreciation rates of petrol, diesel, electric, and hybrid cars would be different. Generally, electric and hybrid cars have lower depreciation rates than other types.

Condition and Maintenance

The depreciation rate of your car also depends on the condition of its body and components. If your car is well-maintained and in good condition, its depreciation rate is reduced. It is important to service your car regularly and replace the defective parts promptly.

How to Calculate Depreciation for Car Insurance?

How do I calculate car depreciation? This question pops into the mind of every car owner. Here's how you can calculate the depreciation for your car.

1. Find Out the Original Cost and the Age of Your Car

  • Find the price you paid for your car, including taxes, registration, and other applicable charges.
  • Determine the age of your car from the date of purchase. This will help you apply the correct depreciation rate.

2. Check the Depreciation Rates for Various Car Parts:

Different car parts have different depreciation rates, which must be considered separately. Here is a summary of the depreciation rates prescribed by the Insurance Regulatory and Development Authority of India (IRDAI).

Details of Parts

Depreciation Rates

Rubber, nylon, plastic parts, tyres and tubes, batteries, airbags:

50%

Fiberglass components

30%

Glass Parts

No depreciation (100% of the cost covered)

 

For all other parts (including wooden parts), the depreciation is calculated based on the age of the car as per the schedule below:

Age of the Car

Depreciation Rate

Not exceeding 6 months

No Depreciation

Exceeding 6 months but not exceeding 1 year

5%

Exceeding 1 year but not exceeding 2 years

10%

Exceeding 2 years but not exceeding 3 years

15%

Exceeding  3 years but not exceeding 4 years

25%

Exceeding  4 years but not exceeding 5 years

35%

Exceeding 5 years but not exceeding 10 years

40%

Exceeding 10 years

50%

4. Calculate the Depreciation

Calculate the depreciation on various car parts using the above-mentioned depreciation rates. You can also use an online depreciation calculator provided by various insurance companies.

6. Calculate the Insured Declared Value (IDV)

The insurance company will use the car's depreciated value to calculate the Insured Declared Value (IDV), which determines the claim amount in case of total loss or theft.

How to Reduce the Impact of Depreciation on Car Insurance?

Every car is bound to depreciate eventually due to its limited lifespan. However, you can take some steps to reduce the impact of depreciation on car insurance.

Purchase a Zero Depreciation Cover

The best option to reduce the impact of depreciation is buying a policy called zero depreciation in car insurance. If you have this coverage, the insurance company will not reduce the depreciation amount while calculating your claim amount. This increases your claim amount. However, remember that zero depreciation in car insurance is available for only a specified number of years, usually 5-7 years. After that period, you will have to bear the depreciation cost.

Keep Your Car in a Good Condition

To improve its Insured Declared Value, keep your car well-maintained. Service it regularly, change its oil whenever necessary, and replace any defective parts immediately. This will minimize the wear and tear on your car.

Purchase High-quality Cars

Make sure that your car is sturdy and has high-quality parts. You can ensure this by choosing a manufacturer known for making the best quality cars. You can also check customer reviews, safety reports, and quality ratings of your car model.

Bottom Line

Depreciation significantly impacts your insurance claim amount because insurance companies reduce depreciation while calculating the amount payable. Although depreciation occurs due to natural wear and tear, you can reduce its impact by purchasing zero depreciation cover in car insurance and by keeping your car in good condition.

 

FAQs on car depreciation

Is it good to take zero depreciation car insurance?

Yes, a zero depreciation cover can be beneficial because it results in a higher claim amount. However, it is valid for a specified period and has to be purchased at an additional cost.

How does depreciation affect our car?

Depreciation gradually reduces the value of your car. Every car has a limited lifespan, and some wear and tear is bound to happen due to usage.

How does depreciation affect car insurance?

Depreciation affects your insurance claim amount because insurance companies reduce the depreciation from your car's value while calculating the Insured Declared Value which determines the claim amount.