Have you ever considered buying a Zero Depreciation car insurance for your car’s motor insurance policy?
A car insurance policy is compulsory when you purchase a new car. Why do you need insurance? In case of any damage to your car due an accident, an insurance policy reduces your liability to a great extent. The insurance company takes care of the cost incurred because of repair or replacement of car parts, subject to certain conditions.
If you think that the insurance company pays the entire cost of the damages to the repair of the vehicle, you are wrong. There is an element of depreciation involved in the transaction. This entails that the insurance company is responsible for honouring the insurance claim, subject to deduction of depreciation. Is that not a loss to you? Yes, it is.
This brings you to the next question. “Is there a way out by which you do not incur any loss because of the depreciation factor?” Yes, there is. You can go for a ‘Zero Depreciation car insurance Policy (Zero Dep)’. Let us look into the concept of Zero Depreciation and understand the implications, benefits, and demerits in this article.
Before we go into the actual concept of Zero Depreciation car insurance, let us look at the concept of depreciation in brief. In very simple terms, depreciation is the decrease in the value of the assets as they grow older.
When does the depreciation start taking effect? The ‘depreciation count’ starts the moment your new car rolls out of the car showroom. It indicates that the car experiences an immediate reduction in value from ‘Day 1’.
Your car has metal, plastic, fibre, and glass parts. Each part has a different rate of depreciation.
The concept of depreciation comes into effect only if you make a claim against the insurance company for damages caused to the car. Is there any thumb rule for evaluating the depreciation amount in case of any claim for damages? The Indian Motor Tariff (IMT) have stipulated the following deduction by way of depreciation.
It works out in the following manner:
0% for the first six months
5% for the first year (over 6 months to 1 year)
10% for the second year and so on}
What does this signify? When you claim damages from the insurance company, the insurance company honours your claim by paying the amount after deducting depreciation based on the proportion stipulated by the IMT. This deduction is known as ‘Claim Depreciation on the car insurance”.
When you take a ‘Zero Depreciation Add-On Cover’ on your car insurance policy, you get protection against the ‘Claim Depreciation’. This entails that you do not incur any payment from your side because of the depreciation factor. In other words, the insurance company can pay the cost of your damaged parts without deducting depreciation on the same.
There is no such thing as a free lunch in this world. Similarly, the Zero Depreciation Add-On Cover comes at a cost—a higher premium. But if you’re likely to make a claim in the year you may want to pay a little extra in the start to avoid the heftier payment later.
Is it compulsory to take this Zero Depreciation car insurance? Strictly speaking, it is not, but it is advisable to do so.
People purchasing new cars or those possessing relatively new cars less than 5 years old should preferably go for Zero Depreciation Add-On Cover. This cover is beneficial under the following circumstances.
This is only an indicative list. In fact, anyone can buy this Add-On cover as long as your insurance company is comfortable with it.
Generally speaking, the Zero Depreciation premium depends on the following three factors.
The benefits of taking this Add-On cover are as follows.
Zero Depreciation – Drawbacks
Take note of the following drawbacks of taking this Add-On cover
We shall make it clear with the following live example. Consider you have a car that’s over 6 months old but less than 1 year in age; it is worth Rs 10 Lacs. There has been a minor accident necessitating repairs to various parts of the vehicle. The total cost of the repairs comes to say Rs 29,000. The breakup of the expenses is as follows. We shall also look at the depreciation factor that comes into play.
Damage cost in Rs. - 10,000.00
Depreciation / the amount you have to incur - 5% = 500.00
Damage cost in Rs. - 14,000.00
Depreciation / the amount you have to incur - 50% = 7,000.00
Damage cost in Rs. - 2,000.00
Depreciation / the amount you have to incur - 30% = 600.00
Damage cost in Rs. - 3,000.00
Depreciation / the amount you have to incur - 0% = 0
Damage cost in Rs. - 29,000.00
Depreciation / the amount you have to incur - 8,100.00 – Amount you incur
This table clears the concept of how insurance claims work. Hence, you see that in case of a claim for Rs 29,000.00, you get Rs 20,900 only. You have to spend Rs 8,100.00 from your pocket towards depreciation. This is a very simple example. In reality, you find various other factors coming into play as well.
The term ‘Zero Depreciation’ means that you do not have to incur any cost towards depreciation. This entails that you get full coverage and thereby complete compensation. Thus you see in a Zero-Depreciation policy, you do not have to pay anything. The insurance company pays the entire amount.
The above table explains it all. In short, we can say that the insurance company pays for the entire cost of repairs without accounting for the ‘Claim Depreciation’ factor.
In the normal case, only new cars are eligible to go for the Zero Depreciation Add-on Cover. However, insurance companies do consider if the car is relatively new. By relatively new, we understand that the car should not be more than 5 years old. Some companies offer a fixed amount of deduction for older cars that acts like a quasi-Zero Depreciation car insurance policy.
Practically speaking, all cars should have this policy in force. It is beneficial under the following circumstances.
The add on premium amount increases every year with the age of the vehicle, also there is a significant loss for the insurance company if they were to offer zero depreciation claims on severely depreciated parts. Hence, insurance companies do not normally encourage Zero Depreciation Add-on cover for cars over 5 years old. However, every rule has an exception. You should contact your insurance provider can explore this possibility of getting Zero Depreciation cover for your older vehicles. There are chances of the company allowing the same, especially if there has not been any claim in the previous years. Customer loyalty plays an important factor as well. Of course, the premium will be higher the older the car gets.
A lot of people may claim to sell you a Zero Depreciation add-on as fully bumper to bumper insurance, but you should be aware that a few types of damages and certain parts of the car won’t be covered even despite having a Zero Depreciation cover. So be informed about the exclusions (what isn’t covered) when it comes to buying this cover!
Even despite this, the Zero Depreciation can be a cheaper policy as explained in our example above if you are likely to make a claim for sure.
Zero Depreciation, as the name suggests, does not account for the ‘claim depreciation’ amount while honouring insurance claims. Hence, it is beneficial for people buying cars and expect to make a claim for any reason. You should not mind paying the extra 15-20% over the regular insurance premium to avail the additional benefits offered under this Add-On policy. We trust that we have cleared the concept of Zero Depreciation.
Also you want to know how a Zero Depreciation is different from a third party or comprehensive insurance policy? Read our blog to know more!
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