Does the Value of Car Affect It's Insurance Premiums?

Everybody wishes to buy the best car in their budget. They desire to buy a car, which is the epitome of comfort, style, safety and durability, without breaking a bank. Some people also buy an expensive car to upgrade their current fleet. Purchasing a high valued car can reflect the improvement in your standard of living and can be a head-turner. When you buy an expensive or high valued car, you not only ensure greater luxuries but also increase your car insurance premium.

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What is Car Insurance Premium?

If you own a car, you must be aware that the Motor Vehicles Act, 1988 mandates every car in India to be covered under a valid car insurance policy. In India, you can either buy a third party car insurance or comprehensive insurance for your car. Third party car insurance covers any third party liabilities arising out of your car due to causing injuries or property damages to third parties. Comprehensive car insurance provides broader coverage by covering your third party liabilities and damages sustained by your car in a fire, accident, manmade calamities, natural disasters or theft.

Although you have the freedom to buy the best car insurance as per your suitability, you must ensure that it includes third party insurance coverage. This is because a third party cover is necessary to abide by the motor laws of the country. You can compare car insurance from various motor insurers online to choose the best car insurance policy as per your budget and needs.

You cannot buy a car insurance policy without paying a premium. Car insurance premium refers to the amount that you pay to a motor insurance company to ensure financial protection against any loss or damages to your car. It is the cost of the insurance policy that you buy for your car. The premium for a car insurance policy is determined based on several factors. The value of the car is one of the biggest factors that determine the premium price of a car insurance policy. It affects how much you will pay for your car insurance policy.

How the Value of a Car Affects the Car Insurance Premium?

The value of a car directly impacts the premium of a car insurance policy. The higher is the value of your car, the higher will be the cost of your car insurance policy. This happens because of two reasons. First, high valued cars come with expensive car parts. If your car gets damaged, the cost of repairing or replacing the parts of a car will be higher than that of lower-priced cars. As a result, your motor insurer will have to shell out more money to repair your car. Therefore, insurers charge higher car insurance premiums for expensive cars as compared to affordable cars. For example, your insurer will have to pay more money to repair an SUV than a hatchback car as the former is more expensive.

Second, high valued or expensive cars catch everyone’s attention very easily. The likelihood of your high-end car attracting the attention of criminals or thieves and getting stolen is more than that of a simple and affordable car. Therefore, your insurer will have to pay more money to replace an expensive car than an affordable car. Since expensive cars are a greater liability for a motor insurer, they charge a higher premium for insurance of such cars.

The value of your car can also impact the type of car insurance that you can buy. Although the motor laws only mandate for a third party insurance cover for every car, some motor insurers may ask you to opt for a comprehensive car insurance policy if you have a high valued car. The insurer may not offer third party car insurance for expensive cars. This may happen because any loss or damages caused to the car is not covered under a third party car insurance policy.

How Does Motor Insurance Companies Determine the Value of a Car?

When you buy the best car insurance for your vehicle, the motor insurance company determines the value of your car to estimate the IDV. The IDV or Insured Declared Value refers to the maximum claim amount that the insurance company will pay to you in case you raise a car insurance claim. The IDV is calculated by subtracting the depreciating value of your car from the current value of the car.

The value of a car is determined by considering its current market value. Insurers do not consider the invoice value of a car as the value of a car keeps changing over time. To determine the current value of a car, the insurers consider the market value of a car and subtract depreciation from it to arrive at the IDV.

If your car gets completely destroyed in an accident and is beyond repairs, your insurer will write-off your car. As a consequence, your insurer will pay you the full IDV decided at the time of buying the car insurance policy. The higher the IDV of the car, the higher will be the claim amount that you will receive from your insurer. Thus, it is important to not settle for a lower IDV at the time of buying insurance for your car. You can compare car insurance plans online before policy purchase and buy a policy that offers you an IDV closest to the current market value of your car.

Besides, you can also buy zero depreciation add-on cover to ensure a higher IDV. The zero depreciation cover ensures that your motor insurer does not subtract the depreciating value of your car while estimating the IDV of your car. Since it is an add-on cover, you will have to pay a slightly higher car insurance premium to buy this cover. Moreover, this add-on cover is only available for cars that are not older than five years.

What Happens to Car Insurance Premium if You Upgrade to a Higher Valued Car?

If you upgrade your car to a high valued car, your car insurance premium will increase. The premium that you were paying until then was for the old car which was for a lower value than the new car. When you switch to an expensive car, the motor insurance company will charge you a premium based on the liabilities posed by the new car. Since high valued cars come with expensive car parts and pose a greater liability on the insurer, the motor insurance company will ask you to pay a higher premium in exchange for the car insurance coverage.

When you buy a new car, you can get the car insurance policy for your previous car transferred to your new car, provided you are no longer going to use the old car. You need to inform your insurer and submit the required documents to get your existing car insurance transferred to your new car. However, you will be required to pay the difference in the premium of the old car and the new car at the time of transfer.

Make sure to inform your motor insurance company as soon as you upgrade your car and get the car insurance policy transferred. If you fail to do so, you will not be able to raise a car insurance claim if your brand new car suffers from any damage. Even the best car insurance will not cover the damages of your new car if it has not been transferred from your old car to the new car.

Other Factors that Affect a Car Insurance Premium

Apart from the value of a car, there are several other factors that a motor insurance company considers to determine the premium for a car insurance policy. Take a look at some of the factors that affect car insurance premiums:

  • Age of the Car - The value of a car decreases as the vehicle gets older. As a result, the car insurance premium reduces as the age of a car increases.
  • Engine Capacity of the Car - A car with a higher engine cubic capacity may be more expensive to repair and may have expensive engine spare parts. Therefore, the premium of a car insurance policy is higher for a car with a higher engine cubic capacity.
  • Make & Model of the Car - The make and model of a car also impact car insurance premium. The premiums are higher for higher-end cars as such cars are more expensive.
  • Service Location of the Car - The geographic location where you use your car affects your car insurance premiums. You will have to pay a higher premium if your car is used at a place which is accident-prone or unsafe.
  • Type of Car Insurance Cover - Third party insurance provides lesser coverage than a comprehensive car insurance policy. Hence, you will have to pay a higher car insurance premium if you buy comprehensive insurance instead of the third party insurance policy.
  • Safety Features of the Car - Cars with safety features reduce the risk of the vehicle getting stolen. As a result, cars with more safety features will be offered lower car insurance premiums than cars without any safety devices installed.

In a Nutshell

Buying a high-end expensive car is no less than a dream for many people. But expensive cars also lead to higher car insurance premiums as the value of such cars is higher. Therefore, you must compare car insurance plans to find the best car insurance for your vehicle that is not only affordable amongst the available options but also offers sufficient IDV.

Written By: PolicyBazaar - Updated: 26 August 2021
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