What is Zero Depreciation in Car Insurance?

Car insurance is essential for a car owner to save on the huge expenses that may occur in case of accidents. Car insurance makes the insurance company bear the losses for the car and its parts damage and even damage done by the car to third parties.      

Since it is important to choose a more cost-effective insurance policy, the concept of zero depreciation car insurance is worth exploring. It saves you more during car damage or accidents against a slightly higher premium price.  

Definition of Depreciation?

Depreciation is the lowering of the value of a product due to its continuous usage and damage due to wear and tear.  The value of a car starts reducing from the moment it is taken out of the showroom.

The concept of depreciation applies to almost all sorts of products. During settlement, the percentage of the depreciation is deducted from the settlement amount, and owners need to bear it from their pocket. 

What is the Meaning of Zero Depreciation Car Insurance?

Many people often confuse what is zero depreciation in car insurance, and how depreciation is relatable in insurance. 

Zero depreciation car insurance means that the insurer will not apply depreciation rates, the value of the car during the insurance policy is fixed, and settlement in case of accidents will be done from the same amount.  The owner of the car need not pay from their pocket.

It can be understood that the insurer will use the same value of the car as at the start of the policy to calculate settlement, and no depreciation will be deducted, and thus you can claim the full repair amount.

What is the Difference Between a Comprehensive Policy and a Zero Depreciation Policy?   

There are various core differences between a comprehensive policy and a zero depreciation policy. Let’s explore them -

The difference between both insurance policies can be further understood with the following examples -

What is the Depreciation Rate Applicable for Vehicles?

The Insurance Regulatory Development Authority of India (IRDAI) has set some standard depreciation rates that insurers need to follow in India. The depreciation rates applicable in comprehensive policy are based on this. 

The rates set by IRDA are shown in the below table - 

Depreciation is calculated at different rates for different parts of the car as shown above. It can be understood with an example.

Illustration

Jacob met with an accident in his car, and the fiberglass mirror broke. Jacob went to the insurance company, as luckily he had purchased a comprehensive car insurance policy. The cost of the fiberglass mirror is Rs. 10,000. During settlement, the insurance company paid Jacob with just Rs. 7,000.

The remaining amount of Rs. 3,000 is deducted from the comprehensive insurance policy via a 30% depreciation rate on fiberglass parts. If Jacob had purchased the add-on zero depreciation insurance policy, then the whole cost of Rs. 10,000 would be borne by the insurance company.    

Factors Affecting the Purchase of Zero Depreciation Policy  

The following factors must be considered before purchasing a zero depreciation policy :

• Up to 5 years

A zero depreciation policy is applicable on cars up to 5 years old, thereafter one cannot purchase a Zero depreciation policy.

• High premium

Insurance policy with Zero depreciation as add-ons have more premium to pay. The premium could be 15%-20% higher than the normal policy.

• Limited claims

You cannot claim multiple times with a zero depreciation policy, with different companies, the number of claims differs. 

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