‘Time’ could be your biggest ally or your biggest enemy, depending on the way you look at it. In case of motor insurance, time is usually your enemy because you are fighting a dangerous opponent called ‘Depreciation’.
Every vehicle drops in value as it ages and ‘depreciation’ is a measure of how much that drop is. Every insurer factors in depreciation and insures only insure the current depreciated value of your vehicle. Note that ‘depreciated’ value could be significantly different from ‘replacement’ value and therein lies a ‘problem’. ‘Zero depreciation’ add-on is an such an instrument that reduces impact of this problem. In this article we will discuss all aspects of this add-on cover – its cost, its value and whether such cover is worth the price and who should take such cover. For more information on how to choose a good insurance for your vehicle, have a look at our previous blog "A care for your car".
What is zero depreciation cover?
Components on your car (both metallic and non-metallic) are assumed to depreciate over time because of regular wear and tear. Depreciation rate for each component is different and non-metallic components are assumed to depreciate faster than metallic ones. You as a car-owner face a harsh reality that within a couple of years, your insurance company pays almost nothing on damage to those components. A ‘zero depreciation’ cover protects you against such risks by always covering a full ‘replacement’ value of a component. You as a consumer can relax because you know that your out-of-pocket expenses at the time of claim are going to be minimal.
Why do you need this cover?
To understand this, readers should know the financial implication of not being covered for this risk. Readers should also understand how insurance companies price the depreciation risk. Below chart shows what insurance company pays and what you pay for some common repairs at a workshop (actual rates may vary based on vehicle model etc. but these rates are ballpark for a mid-range car whose value is assumed at Rs 10 Lacs)
Table above clearly shows that non-metallic components are depreciated heavily by insurance companies while paying claims under standard insurance cover. As a result, customer usually ends up paying 50% of charges out-of-pocket. It is important to know that plastic, rubber and fiber glass components on your car are discounted heavily. Metallic parts, in contrast, depreciate much lower. Below info-graphic shows how insurance companies depreciate individual components.
Cost of zero depreciation cover
This percentage will be lesser for newer cars and keeps increasing as the car gets older. Zero depreciation cover is only applicable for cars under 5 years of age.
Let’s see how zero depreciation premium change for a given insurer for different types of cars:
Now let’s see how zero cover premium changes over time for same car as a percentage of premium offer. We take a Maruti Swift Dzire VXI version and estimate ‘Zero Depreciation’ cover as a percentage of base premium for different years. Following chart shows that ‘zero depreciation’ cover becomes costlier as your car ages but then again, readers would note that its value is higher for older cars.
Overall, premium increases by atleast 30% and hence this cover is for customers who are seeking ‘value’ from their insurance policy. Want Zero depreciation but don't want to pay more? Here's an article which can help you in reducing your premium cost for the insurance. You also look at our blog on Return on invoice cover which gives your complete value irrespective of its current market value in case of total damage in an accident. If you leave in area where floods are common then you can also look at our blog on Engine protection cover add-on.