Aditya Birla Sun Life Insurance Company Limited

Depreciation Meaning in Insurance

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Depreciation refers to the reduction in the worth of a vehicle over time as a result of age, use, and deterioration. As the car ages, its value in the market decreases, leading to a decrease in the amount that can be claimed for insurance purposes.

Importance of depreciation in insurance

Depreciation is the reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors. In car insurance, depreciation is an essential factor in determining the Insured Declared Value (IDV) of the car.

The IDV is the maximum amount that the insurance company will pay in the event of a total loss or theft of the car. It is calculated based on the current market value of the car, taking into account the depreciation rate.

The depreciation rate is determined based on the car's age and type of car. For example, the depreciation rate for a car that is less than six months old maybe around 5%, while the depreciation rate for a car that is more than five years old may be around 50%.

Here's an example to illustrate how depreciation affects IDV calculation:

Suppose you purchase a new car for Rs. 10 lakhs. After one year, the car's IDV may be calculated as follows:

Assuming the depreciation rate for a car that is one year old is 15%, the IDV of the car will be:

IDV = (10 lakhs) x (1 - 0.15) = Rs. 8.5 lakhs

In this case, the IDV of the car is Rs. 8.5 lakhs, which is the maximum amount that the insurance company will pay in the event of a total loss or theft of the car.

It is essential to note that the IDV is not the same as the market value of the car. The market value of the car may be higher or lower than the IDV, depending on the current market conditions and other factors.

Depreciation is an essential factor in determining the IDV of a car in car insurance. The IDV is the maximum amount that the insurance company will pay in the event of a total loss or theft of the car. It is crucial to understand the concept of depreciation and IDV calculation to make an informed decision while purchasing car insurance.

How to avoid bearing the cost of depreciation?

Numerous insurers provide an optional extra known as the Depreciation Shield, which can be added to a comprehensive car insurance policy by paying an additional premium.

The Depreciation Shield covers the depreciation amount, either partially or entirely, on damaged parts that need to be replaced during repairs due to partial loss of the insured vehicle. However, this add-on does not apply in cases of complete loss, also known as 'Total Loss' in insurance terms. The Depreciation Shield is especially beneficial for owners of high-end cars, as the parts are expensive and may not be readily available.