Six car insurance terms you must know this monsoon

With each passing year, as the car depreciates in value, the IDV too goes down.

With torrential rains causing flooding and destruction in Himachal Pradesh, Uttarakhand and other parts of North India, those affected will have to brace themselves for dealing with damage to their belongings. For many, this will involve dealing with car damage and filing insurance claims to take care of these expenses.

If you are someone planning to buy a car, here are a few key terms to familiarise yourself with before you sign up for insurance for your car.

Insured declared value (IDV)

This is the maximum amount that you can get from your insurance company in case of total loss (car damaged beyond repair), or if the car has been stolen. You can think of it as the sum assured as in the case of your health or life insurance policy.

Insurance companies arrive at the IDV based on the ex-showroom price of the car, on which a standard depreciation rate is applied. With each passing year, as the car depreciates in value, the IDV too goes down. The IDV is disclosed in your car insurance policy schedule, which also mentions your policy premium.

To calculate the IDV, an insurance company applies the depreciation rates as specified under the Indian Motor Tariff Act. Going by that, the depreciation rate for a car that is up to 6 months old is 5 percent, for one that is over 6 months to up to 1-year-old, it is 15 percent and so on. For a car that is over 4 years to up to 5 years old, the depreciation rate is 50 percent.

So, how is the IDV estimated from the fifth year onwards? As per the Indian Motor Tariff Act, the IDV of a vehicle beyond 5 years of age is determined based on an understanding between the insurer and the insured. But that’s not how it actually works.

“As a practice, the IDV is estimated by applying a 10 percent depreciation on last year’s IDV by the insurance company, and accordingly the renewal notices are generated,” says Nitin Kumar, Head – Motor Insurance, Policybazaar.com.

Also read: North India floods: How to file insurance claims for your damaged car

Third-party cover

This is a mandatory component of any car insurance policy. This helps you cover the cost of any damage by your car to a third party.

The third party is any affected person who is entitled to payment from the insurance company (second party) for damage due to the policyholder’s (first party) car. This provides you protection against damage to another vehicle and property, and death of a person in case of a car accident involving you.

Personal accident cover for owner

This too is a mandatory component under car insurance. As per IRDAI (Insurance Regulatory and Development Authority of India) guidelines, every car owner must have a personal accident cover of Rs 15 lakh. IRDAI has fixed the premium for this at cover at Rs 750 if you buy this as part of your car insurance policy. If you wish, you can opt for a larger cover by paying an additional premium.

Note that, if you own more than one car, you don’t need to buy a personal accident cover as part of the insurance policy for each of these cars. You will have to take this cover only when buying your first car. Alternately, if you already have a standalone personal accident cover (not as part of any car insurance policy), then in that case too, you don’t have to buy bundled cover with your car insurance.

A personal accident cover helps you cover your medical expenses in case of an accidental injury. It also provides monetary compensation to you in case of permanent disability and to your family in case of death due to an accident.

Deductibles

This is the amount that a policyholder has to pay before the insurance company pays the remaining bill. The deductible applies to every claim you file. For example, if you make an insurance claim for Rs 10,000, and the deductible is Rs 1,000, then you have to pay Rs 1,000 and the insurance company pays the rest. Deductibles serve the purpose of ensuring that the car owner takes adequate care of his car.

There are two kinds of deductibles – compulsory and voluntary. The compulsory deductible is what you are mandated to pay for every claim. Based on IRDAI regulations, this is fixed at Rs 1,000 for cars with an engine capacity of up to 1,500 cc (cubic centimetres) and at Rs 2,000 for beyond that.

Voluntary deductible, on the other hand, is something that you can opt for. If you do that, it means you will foot a larger part of your car repair bill but at the same time, you will pay a lower premium.

Kumar highlights the four voluntary deductible options that you can choose from. You can opt for a voluntary deductible of Rs 2,500 (for a 20 percent discount on own damage premium subject to a cap of Rs 750), Rs 5,000 (25 percent discount, cap of Rs 1,500), Rs 7,500 (30 percent discount, cap of Rs 2,000) or Rs 15,000 (35 percent discount, cap of Rs 2,500).

 Zero depreciation

This is an add-on cover that you can take in addition to your base car insurance policy. This enables you to cover the cost of replacing your car parts (without accounting for their depreciated value) in case of an accident. This feature comes at an extra cost. Without this cover, you will be compensated for the replacement cost of the car parts based on their depreciated value only.

For example, following an accident if the repair cost for your car comes to Rs 10,000. Then after applying say, a depreciation rate of 20 percent on the car parts and a deductible of Rs 1,000, the insurance company will pay you Rs 7,000. If you have a zero depreciation cover, then the insurance company will pay you Rs 9,000 (Rs 10,000 minus Rs 1,000).

According to Deepak Karani, a Mumbai-based insurance agent, most insurance companies allow you to opt for this add-on cover during the first 5 years of your policy subject to an inspection of the car, if not taken earlier. A few insurance companies allow you to take this up to 10 years. So, how much can a zero depreciation cover cost you? Giving an example, Kumar says that for a car with an IDV of Rs 10 lakh, the zero depreciation cover could cost roughly Rs 3,000 to Rs 5,000 in the initial years.

Also read: Motor insurance riders: All you need to know for a smooth ride

Engine protect

Just like zero depreciation, engine protect too is an add-on cover. Engine protect, as the name suggests, provides you a cover against the cost of replacing or repairing the car engine. This covers damage due to reasons other than accident-related damage. For example, it provides protection against damage due to water ingression, leakage of lubricating oil, gearbox malfunction, etc.

This cover can come in handy in case of engine damage due to your car getting stuck in a water-logged area. Experts we spoke with pointed out that if you find yourself in such a situation you must contact the insurance company at the earliest. If you force-start the submerged car, any damage as a result of that will not be covered by the insurer.

According to Karani, the cost of zero depreciation and engine protect add-on covers in the first 7 years can vary from 0.75 to 2.0 percent of the car IDV, depending on its age and model.

“Zero depreciation and engine protect are among the most popular add-on covers that most people choose for their cars,” says Karani. Do remember to enquire about all the key aspects relating to a car insurance policy before you take up one. When it comes to add-on covers, evaluate the additional cost with its benefits.

Also read: Majority of insurance-buyers find products & processes to be complex: Policybazaar study