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Why Depreciation Matters in Motor Insurance

Zopper Team Basics of Insurance December 15th, 2023
Depreciation in Motor Insurance

Depreciation is the decline in the tangible value of a machine with use over time. Like the value of most assets reduces over time, so does the value of your vehicle and this is known as depreciation. 

What is Depreciation in Motor Insurance?

In motor insurance parlance, the depreciation of a car/ bike affects its IDV and also the claim amount. The thumb rule is the older your car/ bike, the higher its depreciation would be. Even when you choose the best comprehensive motor insurance policy, a portion of the coverage gets exhausted every few months/ years with depreciation.

It may come as a surprise to many, that the moment your car/ bike leaves the showroom, it loses its ex-showroom value by almost 5%. 

To bring transparency and a system in which motor insurance companies calculate depreciation, the IRDAI regulates these rates of reduction. The age of the vehicle and the rate of depreciation are as follows: 

  • Less than 6 months - 5%

  • Over 6 months yet less than a year - 15%

  • Over 1 year yet less than 2 years - 20%

  • Over 2 years yet less than 3 years - 30%

  • Over 3 Years yet less than 4 years - 40%

  • Over 4 Years yet less than 5 years - 50%

  • When the car/ bike is over 5 years, the depreciation is mutually decided by the insurance company and car owner. 

How Depreciation Impacts Your Motor Vehicle Cover

Depreciation not just affects your vehicle’s value over time, but as depreciation increases, your share in comprehensive motor insurance also increases. As the loss in value is not covered under regular motor insurance. In case you wish to shield yourself from depreciation, consider a zero-depreciation add-on along with a comprehensive or a standalone own-damage cover.

Despite the decrease in your vehicle’s value, your claim would be settled fully if there’s any accidental damage. Zero-dep or a bumper-to-bumper add-on can be generally purchased for vehicles that are less than 5 years old. 

No matter, you are buying a brand new car or a pre-owned car that is less than 5 years old, a zero-dep cover is highly recommended., especially if you use your car/ bike regularly. A key advantage of having zero depreciation insurance is that it minimises your out-of-pocket expenses and the possibility of a 30 percent to 40 percent reduction that may occur in the claims payout due to depreciation. 

Simply put, having a zero-depreciation add-on makes a big difference to your overall motor insurance cover.

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