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Car Insurance Depreciation: Impact of Depreciation In Car Insurance

Team AckoApr 30, 2024

Each year the cost of a car reduces. This reflects on the resale value of the car as well. Ever wondered why a used car costs less than a new one even if it might be just a few months old? The reason is car insurance depreciation, and it increases with each passing year. This article describes how depreciation affects your car insurance policy.




Impact of Depreciation on Car Insurance:

Depreciation has a monetary impact on the value of the car. The cost of your car insurance policy or premium depends on the car's value. Thus, when the value of your car reduces the cost of your car insurance policy also goes down.

Another factor affected by the reduced value of the car is car insurance claims. Since the actual value of the car is lower than the original cost, the claim amount is also less. Here is an example to understand this concept better:


Consider Mr A has bought a new car worth Rs. 10 Lakh. He paid Rs. 15000 as a premium for his car insurance policy in the first year. 

After one year of purchasing the car, its value has now reduced to Rs. 9 lakh and the cost of his insurance policy has dropped to Rs. 12000. This continues with each passing year.

If you notice, you will find that the value of the car insurance policy is decreasing because the value of Mr A's car has reduced. These values will keep on decreasing as more and more time passes. 

What is Zero Depreciation Car Insurance Add-on?

With the Zero Depreciation Car insurance add-on, the insurance company will consider the depreciation as zero while calculating the claim amount. This add-on is only available with a Comprehensive car insurance policy. Buying a Zero Depreciation add-on will help you get more money during claim settlement.

How To Calculate Car Depreciation? 

The depreciation on the car is calculated by the car's age and its Insured Declared Value (which can be calculated using any IDV calculator). More the age of the vehicle more will be the depreciation suffered. To calculate the exact amount of depreciation, the insurance company will take into account various car parts like tires and tubes, nylon parts, batteries and airbags, fibreglass, and paint. Glass parts are not considered for depreciation.

Different Rates of Depreciation for Car Parts: 

The depreciation on car parts is calculated as per the manufacturing year of the car as well. This helps in calculating the claim amount in case a specific part is damaged. The insurance company will calculate the overall cost of damage and then deduct depreciation from the claim amount as per the age of the car.

The rate of depreciation on car's rubber, nylon, plastic and battery parts is calculated as 50%. On fibreglass parts, the depreciation is calculated as 30%. For any damage to the wooden parts, the depreciation is calculated as per the age of the car, and there is no depreciation on the glass parts if they are damaged.

Depreciation Remedy:

Depreciation tends to reduce the claim amount and this can be an inconvenience in the time of need. One can avoid this from happening with the help of a Zero Depreciation Add-on. Thus, it is safe to say that buying a Zero Depreciation add-on is a remedy on depreciation. This add-on can be bought while purchasing an insurance policy for a new car or while you are renewing an existing car insurance policy. 

It is important to note that most insurance companies offer the Zero Depreciation Add-on on new cars for the first five years. After this time, the policyholder needs to bear the cost of depreciation from his/her pocket.

Also, read: Return to Invoice vs. Zero Depreciation


Depreciation decreases the claim amount and the Zero Depreciation cover can help avoid this for new cars.

Frequently Asked Questions:

What happens when the Zero Depreciation Add-on is not purchased?


The claim amount will reduce if a Zero Depreciation Add-on is not purchased along with a Comprehensive car insurance policy. This increases the out of pocket expenses for the policyholder.

What is the difference between Zero depreciation car insurance vs normal car insurance policy?


There is a difference in calculating the claim amount in zero depreciation car insurance vs normal car insurance policy. The claim amount for the zero depreciation car insurance policy will be more because depreciation is not considered while settling the claim.

What is meant by car insurance depreciation value?


The monetary value of depreciation is called the car insurance depreciation value. This value increases with each passing year and thus has a direct effect on the claim amount.

What affects a car's depreciation?


Car’s age is the main factor that affects depreciation.

What is a car insurance depreciation calculator?


Ideally, it is a tool that calculates the amount of depreciation virtually suffered by the car. However, no such tool is available for the policyholder. Instead, a tool called IDV calculator will help in determining the actual value of the car in terms of car insurance. This can be used as a reference for calculating depreciation.

Why is Insured Declared Value important under car insurance?


Insured Declared Value or IDV is the value of a car for a certain policy period. It is more or less the market value of the vehicle. This amount gains importance in case the car suffers extreme damage i.e. damage beyond repair or total loss. The insurance company will then settle the claim amount equal to the IDV of the car.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet; and is subject to changes. Please go through the applicable policy wordings for updated ACKO-centric content and before making any insurance-related decisions.


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