5 Important Motor Insurance terms you should know
If you’ve just bought a car or a bike for the very first time, or you’re just new to the world of motor insurance, you might be feeling a little overwhelmed with all the complicated terms or jargons you find both online and in your own policy documents.
But that need not be the case. Here at Digit, we have an excellent glossary with some brief definitions of the A-Z of car insurance in India.
But sometimes that isn’t enough, so let’s take a closer look at some really important terms that you should know about your motor insurance.
Knowing all these details will help you to choose the right motor insurance for your vehicle, especially since having at least a third-party policy is mandatory in India.
1. Third Party Policy
Digit Simplification: We all make mistakes! This covers for you if your mistake costs someone else some trouble!
Third-party insurance, which is also called third party liability insurance, is there to cover you against liabilities that can happen in the case of any accidental loss or damage that you caused to any third-party vehicle, person or property.
In this situation, the first party is the vehicle owner, i.e. you! The second party is the insurance company, and the third- party is anyone other than these two parties, i.e. the person/vehicle/property your vehicle has caused trouble to.
Unfortunately, your third-party liability insurance doesn’t cover damages to your own vehicle. (that is covered for in an own damages cover or comprehensive car insurance) However, it is compulsory to at least have a third party insurance according to the Motor Vehicles Act of India.
For example, if you accidentally damage another car’s bumper or another person’s bicycle, your third-party motor insurance will cover for the losses incurred to the third-party due to this.
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2. Comprehensive Policy
Digit Simplification: Because you'd want to protect what you love with your all your heart. 360 degrees protection for your own vehicle.
A comprehensive policy is an all-inclusive insurance policy which covers you from both third-party damages and damages and losses to your own vehicle in the case of an accident, natural calamity, fire or theft.
With most insurance companies, you can even customize your policy further with a variety of add-on covers, such as a passenger cover, breakdown assistance, and a zero-depreciation cover, among many others.
Although the premium you would have to pay for a comprehensive motor insurance is higher than of a third-party policy, it’s still extremely cost effective due to the wider range of coverage and benefits you receive!
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3. NCB or No Claim Bonus
Digit Simplification: Good behaviour should be rewarded! Rewards for being a good driver all year long!
No Claim Bonus or NCB is a sort of discount that insurance companies offer on the premium of your motor insurance if you haven't made any claims during the previous year.
So, if you have been driving safely during the policy year, your insurance company rewards you with a discount on your premium at the time of renewal. This no claim bonus discount ranges from 20%-50% and increases with each claim-less year.
Here is how the discount for a No Claim Bonus is usually calculated:
| Claim free years | No Claim Bonus |
|---|---|
| After 1 year | 20% |
| After 2 years | 25% |
| After 3 years | 35% |
| After 4 years | 45% |
| After 5 years | 50% |
The best part? You can even carry forward your NCB to a different insurance company when changing policies, and even transfer the NCB that you have earned when you sell your car and buy a new one.
Just remember to renew your insurance on time to make sure that your NCB holds good.
4. IDV or Insured Declared Value
Digit Simplification: So you know exactly how much your car is worth!
The IDV or Insured Declared Value of your vehicle is, in simple terms, the market value of your vehicle. Basically, it refers to the maximum amount which an insurance company will pay in case of a total loss or total damage of your vehicle.
So, how is it calculated? The IDV of any vehicle is usually calculated by adjusting the manufacturer’s selling price for depreciation according to the age of the vehicle.
And in case your vehicle also has externally fitted accessories, IDV for them would be calculated separately and then added on.
Essentially, IDV = (Manufacturer’s listed price – Depreciation) + (Cost of accessories – Depreciation)
This is the depreciation schedule usually followed for calculating the insured declared value of a vehicle:
| Age of vehicle | % of Depreciation |
|---|---|
| Not exceeding 6 months | 5% |
| Exceeding 6 months but not exceeding 1 year | 15% |
| Exceeding 1 year but not exceeding 2 year | 20% |
| Exceeding 2 year but not exceeding 3 year | 30% |
| Exceeding 3 year but not exceeding 4 year | 40% |
| Exceeding 4 year but not exceeding 5 year | 50% |
It is very important that the IDV of your vehicle is correctly calculated and given at the time of buying your motor insurance policy, as it ensures that your vehicle is not under-insured. Your premium too is affected by your IDV. So, always make sure it is accurate.
5. Depreciation and Zero Depreciation
Digit Simplification: Just because your vehicle is old doesn't mean it shouldn't get its full value.
Depreciation refers to the depreciation in the actual value of your vehicle and its parts over time, mostly due to wear and tear.
In fact, the second a new vehicle is out of a showroom, it is considered to have depreciated in value by 5%!
The depreciation of your vehicle is based on its age (see above). When an insured vehicle has seen any kind of total loss (like irreparable damage or theft), and you file a claim, the insurer typically deducts this depreciation cost before making the payment.
When there is a partial loss scenario such as minor vehicle damage, the depreciation on its parts will be considered.
In case of a car, the various parts and accessories depreciate at varying rates as follows:
| Vehicle part | Depreciation |
|---|---|
| Parts with high wear and tear - rubber parts, plastic components, battery, tubes and tires, etc. | 50% |
| Fiberglass parts | 30% |
| Metallic parts | 0% to 50%, based on the age of the vehicle |
But what is zero depreciation, you might be wondering. Basically, this is an add-on cover that you can get, where your insurance company will not consider the depreciation of your vehicle and its parts while calculating your claim settlement amount for repairs or replacement.
While this add-on may add to your premium, the benefits offered by the zero-depreciation cover are completely worth the increased cost.
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Hopefully, these terms will now help you better understand the world of motor insurance, so that you can stop feeling overwhelmed with all the complicated terms or jargons the next time you buy or renew your insurance policy for your vehicle!