Zero Depreciation Insurance: Is It a Good Deal?

Customers buying a new car, taking out a loan where the vehicle is pledged or even if it’s just that you want the top and best level of cover, then the comprehensive car insurance plan is the most ideal.

If you own a not-so-expensive car or if you have a two-wheeler and all you are looking for is protection against liabilities such as causing damage to someone else or their property (third-party), then a third-party cover will fit your needs perfectly.

Additionally, you can also opt for add-on coverages like personal accident cover, zero-depreciation cover, hospital daily cash benefit, etc.

Deciding on Your Car Insurance

Car insurance is the last thing on your mind at the time of purchasing a car – especially a new car. A lot of emotions come into play and your thinking becomes blurred.

Most car dealers have tie ups with insurance companies and provide you with car insurance policies as added ‘service’ to the buyer. Most of the companies also offer cash less repair services at designated garages.

Among other things, car insurance companies also offer 24x7 on site support, free towing service and a host of other services or ‘add-ons’ in insurance parlance. If you are stranded in the middle of the road, the towing company that is tied up with the insurance company either fixes the problem on the spot or tows your vehicle to a garage.

A new car owner will be unfamiliar about the various options available to him and will blindly pay for it for the policy offered by the car showroom. Sometimes, crafty car dealers offer “free insurance” as an incentive. It is only when a claim is raised that the poor car owner learns the hard way that cheap is not necessarily good.

Choosing a car insurance is as important as buying a car. Find out the best deal on your car insurance by comparing all available policies on reliable online sources.

What is Depreciation?

Depreciation is the loss of value of a vehicle over time due to age, wear and tear and obsolesces. For example, if a new car is purchased for INR 10 Lakhs its value will decrease with every passing year. If the car is one year old and the depreciation rate is 10% then the value of the car becomes INR 9 Lakhs after one year.

In the event of an accident after one year, the insurance company will calculate the claim based on INR 9 Lakhs. They will also have certain deductions and exemptions; in fine print that are applicable to the policy.

If it fits your budget, it is always advisable to opt for zero-depreciation car policy for complete peace of mind. One accident will convince car owners about the necessity of having a zero-depreciation policy.

Let’s take the example of Mr. Desai who met with an accident. The car was repaired and Mr. Desai paid the garage a certain sum. Mr. Desai has “comprehensive policy” so he is under the impression that he will be reimbursed the full amount of the repair charges. Mr. Desai finds out – too late, that it is not the case. He is paid an amount after taking into account the current value of the car and also certain deductions were made.

Mr. Desai is not alone. Many customers think that having a comprehensive car policy will not have to pay anything. Unfortunately, the part of the deductions by the insurance company will have to be borne by the policy holder.

What Factors you should Consider While Buying a Zero Depreciation Policy?

The following points are to be considered before you decide on buying a zero depreciation policy for your car.

• Since this policy is applicable to new cars under three years it can be purchased by new car owners
• Premiums in this type of insurance are more than the standard policy. It would not make sense to pay extra to insure cars that are more than three years old
• Number of claims is limited. This is to prevent car owners for making claims for every small dent and scratch

The IRDA (Insurance Regulatory, and Development Authority)

As the name suggests this is a Government regulatory agency the makes policies and laws governing all insurance companies operating in India. The mission statement of the IRDA is:

“To protect the policyholders’ interests, to promote, regulate and ensure that the growth of the insurance industry is orderly and for all matters associated therewith or incidental thereto”

This body was formed to standardise the different discrepancies in the operations of the insurance companies across India.

This agency has laid down some depreciation rates for insurance claim purposes. This applies to all Indian and foreign insurance companies across the country. The depreciation rates are as follows:

• Rubber, plastic, nylon parts and batteries are at 50%
• On fibre glass components at 30%
• On wooden parts (depending on the age of the car) at 5% in the first year and 10% in the second year and so on

What is Zero Depreciation Cover?

A safe bet would be to opt for the “Zero-Depreciation Cover” that covers the entire cost of repairing the car without any depreciation costs and other incidental costs that insurance companies do to reduce their liability. For instance if your car is damaged in a collision and you make a car insurance claim with the insurer you will be reimbursed the total repair cost without factoring in the depreciated value of the car.

Taking a comprehensive insurance cover is also not advisable since here the insurance company will factor in the depreciated value of the car and use complex algorithms to come to a figure that is payable to the policy holder. Unfortunately, many insurance companies try to short change policy holders, which is not illegal but it is definitely unethical.

Unsuspecting policy buyers are drawn to the term “Comprehensive Policy” which they believe will cover the entire cost of repairs for damages to their cars.

Zero-Depreciation policy is also known as “Bumper-2-Bumper” cover or “Nil Depreciation”.

What is the Difference between the Two Types of Policies?

In the case of comprehensive insurance cover the policy holder is reimbursed by the amount after a complex calculation taking into account the depreciated value of the car. Whereas, in the case of “Zero-Depreciation” policy the insured car will be reimbursed the full amount of the repair cost regardless the age and current value of the car.

Obviously, zero-depreciation cover will cost more – close to 20% and more than any standard no-frill policy that is available in the market. This is because the insurer takes a greater risk.

For Example, the zero-depreciation premium add-on for a new INR 5 Lakhs would be about INR 4000-4500. For a mid-segment sedan priced at INR 10 Lakhs, you can expect a premium would be about INR 8000.

Zero depreciation policy holders have the following advantage:

• They do not have to pay out-of-pocket expenses since the current cost of the vehicle is not taken into account
• Most of the parts are settled without taking depreciation into consideration
• This type of insurance gives you freedom from worrying about repair costs

Pros and Cons of Zero-Depreciation Policy

When you pay a higher premium amount for the cover, you are indirectly paying for the depreciated cost of the vehicle. This is not palatable to cost conscious customers and could be a real deal breaker for them. Zero-depreciated cover gives you peace of mind and insulates you from future shocks from the insurance companies when they settle the claim. However, this policy pays for itself when you meet with an accident and you do not have to foot the bill.

The number of times that you can make in a zero-deprecation cover is limited. This is to prevent customers from making claims for every dent and scratch.

More importantly, zero depreciation cover only applies to a new car with an age limit of three years. What this means is that no cover will be give to any car that is over three years old it wouldn’t be financially feasible to cover a car that is old. So once a car crosses this three-year-old threshold it would be unwise to buy zeros depreciation cover paying heavy premiums.

When is it Ideal to Purchase a Zero-Depreciation Cover?

A zero-depreciation cover can help you save a lot of money for repairs and when replacing expensive car parts. The following cases, however, are the most popular:

• Luxury cars and cars that require a significant amount of maintenance have parts that are expensive. The depreciation value of these parts would be even higher.
• If you live in an accident- or a danger-prone area such as a mountainous area, next to the sea causing corrosion of parts, areas prone to floods, etc. where the chances of your car needing repairs maybe high.
• If you always worry about small dents and bumps and wish to keep your car in pristine condition always. An insurance cover without nil depreciation will cost you more.
• New drivers, aged drivers, young drivers who are unsure of their driving skills may end up needing repairs more than usual. Choosing an insurance cover without this benefit will not be wise.

Who Needs Zero-Depreciation Car Policy?

This type is ideal for brand new car as it will fully cover all damages to the car. New drivers can also purchase these policies if they are not too confident of their driving.

Even experienced drivers get into accidents for no fault of theirs. It is some novice driver, drunk driver or a rash driver that could create an accident. As far as possible it is advisable for new cars (up to three years) to opt for zero-depreciation car policy. Better to pay a little more (premium) than to pay a lot more (repairs).

Zero-depreciation is a good deal even if you have to pay a little extra. It will pay for itself many times over when you meet with an accident. You will be glad you decided on the zero-depreciation policy when you are presented with a bill from the garage.

Do Your Research – You Know What you Want

Online resources are several and have a lot of detailed information regarding the various types of insurance covers available for cars – new and old. Take the time to compare on site that give you comparisons of different insurers and make knowledgeable decision before you take the plunge.

If you are still confused you can call the help lines of these companies and ask them to explain the different products to you or ask them to send a representative to explain it to you. However, most of these representatives are pushy and try to sell you something that you may not be interested.

You should decide based on your understanding of the products and not because of some insurance company representative who is only interested in maximising his commissions.

Top 4 Zero-Depreciation Insurance Covers

Here are the top car insurance companies in India that offer the zero-depreciation benefit as an add-on:

• Tata AIG Auto Insurance
• Oriental Insurance Co. Ltd.
• New India Assurance Ltd.
• HDFC ERGO Motor Insurance