Car insurance is essential for every driver in India, especially new drivers who may not be familiar with the terminology and types of coverage available. Insurance is a safeguard that protects your car, your finances, and even you in the case of an unfortunate event like an accident, theft, or natural calamity. Understanding the basics of car insurance is crucial, and in this guide, we’ll explain all the important terms in simple and easy-to-understand language, making it easier for you to choose the right policy.
1. Premium
The premium is the amount you pay to the insurance company for your car insurance coverage. It is typically paid annually, although you can also choose to pay quarterly or monthly. The premium is calculated based on several factors like:
- Car model and make: Expensive or high-performance cars usually attract higher premiums.
- Age of the car: Older cars tend to have higher premiums due to the increased risk of damage or breakdown.
- Your age and driving history: Younger drivers and those with less driving experience may face higher premiums. If you have a history of accidents, your premium may be higher as well.
- Location: If you live in a city with heavy traffic, your premium could be higher due to a higher risk of accidents.
Example: Suppose you own a Honda Civic. Since it is a high-performance car, your premium might be ₹15,000. On the other hand, if you own a Maruti Alto, which is a budget car, the premium could be around ₹8,000, reflecting the difference in car value and risk factors.
2. Insured Declared Value (IDV)
The Insured Declared Value (IDV) is the maximum sum your insurance company will pay you if your car is stolen or damaged beyond repair (total loss). This value is calculated based on the current market value of your car, minus depreciation. Depreciation refers to the reduction in the value of your car due to wear and tear over time.
Example: If your car, a Toyota Innova, is worth ₹10,00,000 in the market, and it is 3 years old, the depreciation might be 20%. Therefore, your car’s IDV will be ₹8,00,000. If your car is stolen or severely damaged, the car insurance company will pay you ₹8,00,000 (minus any deductibles) as compensation.
3. Depreciation
Depreciation is the reduction in the value of your car as it ages. It is a key factor in calculating the IDV of your car. In India, insurance companies apply a standard depreciation rate based on the car’s age, which affects how much compensation you will receive in case of a claim. Here’s how depreciation is typically calculated:
- 0-6 months: 5% depreciation
- 6 months to 1 year: 15% depreciation
- 1-2 years: 20% depreciation
- 2-3 years: 30% depreciation
- 3-4 years: 40% depreciation
- 5 years and above: 50% depreciation
Example: If you have a Hyundai Verna that is 2 years old and the market value is ₹8,00,000, then applying the 20% depreciation would reduce the IDV to ₹6,40,000. If the car is totalled, the car insurance company will pay ₹6,40,000 as compensation.
4. Deductible (or Excess)
The deductible is the amount you will need to pay out of your pocket before your insurance kicks in for any claim. There are two types of deductibles:
- Compulsory Deductible: This is a fixed amount set by the insurance company, which you cannot change.
- Voluntary Deductible: This is an amount you choose to pay to reduce your premium. The higher the voluntary deductible, the lower your premium, but you will have to pay more in case of a claim.
Example: If you opt for a voluntary deductible of ₹5,000 to reduce your premium, and your car suffers damage amounting to ₹15,000, you will need to pay ₹5,000 yourself, and the car insurance will cover the remaining ₹10,000.
5. Third-Party Insurance
In India, third-party insurance is the minimum legal requirement for every vehicle. This type of insurance only covers the damages you cause to another person or their property in an accident. For example:
- Bodily injury: If you cause an accident that injures someone else, your third-party insurance will cover their medical expenses and treatment.
- Property damage: If you damage another person’s vehicle or property in an accident, the insurance will cover the repair or replacement costs.
Example: If you accidentally hit a pedestrian while driving and they are injured, your third-party car insurance will cover their medical bills and compensation, but it will not cover any damages to your own vehicle.
6. Comprehensive Insurance
Comprehensive insurance provides a broader range of coverage compared to third-party insurance. It covers:
- Damage to your own car: This includes accidents, natural disasters (like floods or earthquakes), fire, theft, and vandalism.
- Third-party liability: This covers damage you may cause to other people’s property or injuries caused to others.
- Personal accident cover: This protects you in case you suffer injuries or death due to an accident, regardless of who is at fault.
Example: If you are driving your Ford EcoSport and it gets damaged in a flood, comprehensive car insurance will cover the repairs to your car in addition to covering third-party damages if you are responsible for an accident.
7. Own Damage (OD) Cover
Own Damage (OD) Cover is part of comprehensive insurance. This cover specifically protects your own vehicle against damage from accidents, theft, fire, or natural disasters. It is an essential add-on to third-party insurance and ensures that you are financially protected in case of an accident where your car is damaged.
Example: If you’re driving your Maruti Suzuki Swift and crash into a tree, the Own Damage (OD) Cover will help pay for the repair costs for your car’s damages, which wouldn’t be covered under third-party insurance.
8. Personal Accident Cover
A personal accident cover is an important add-on that provides compensation in case you are injured or killed in a car accident. In India, personal accident cover is mandatory for the owner-driver in all car insurance policies. It covers:
- Hospitalization costs.
- Permanent disability or death caused by an accident.
- If you have a family, you can also opt for additional covers for passengers.
Example: If you are the driver of a Hyundai i20 and you meet with an accident, the personal accident cover will help pay for your hospital bills or provide a compensation amount if you are permanently disabled or die in the accident.
9. No Claim Bonus (NCB)
The No Claim Bonus (NCB) is a discount given by the insurance company for not making any claims during the policy term. This bonus can range from 20% to 50% depending on how many claim-free years you have. For example, if you renew your insurance policy after a year without filing any claims, you may be eligible for a 20% NCB, meaning you will pay 20% less in premiums.
Example: If your Maruti Suzuki Baleno policy has an NCB of 20%, and your premium is ₹12,000, you will only pay ₹9,600 during renewal after one claim-free year.
10. Add-ons
Add-ons are extra coverages you can add to your policy for more comprehensive protection. Some common add-ons include:
- Zero Depreciation Cover: This add-on ensures that depreciation is not deducted from the claim amount, allowing you to receive a higher payout.
- Engine Protection Cover: Covers damage to the engine due to natural calamities, oil leakage, or water ingression.
- Roadside Assistance: Provides emergency services like towing, battery jump-start, fuel delivery, etc.Key Replacement: Covers the cost of replacing lost or stolen car keys.
Example: If you are driving a Nissan Kicks and it gets flooded, the Engine Protection Cover will cover the damage to the engine, which would otherwise not be covered under standard insurance policies.
11. Claim
A claim is the formal request you make to your insurance company for compensation after an accident or damage to your vehicle. There are two main types of claims:
- Cashless claim: The insurance company directly settles the bill with the garage. You don’t need to pay upfront, and the garage is paid by the insurer.
- Reimbursement claim: You pay the repair costs upfront, and then the insurance company reimburses you after the claim is approved.
Example: If you get your Mahindra XUV300 repaired at a network garage, you can opt for a cashless claim, where the insurance company will pay the garage directly, saving you the hassle of paying first.
12. Exclusions
Exclusions are situations or events that are not covered by your car insurance policy. These might include:
- Driving under the influence of alcohol or drugs.
- Damage caused by wear and tear over time.
- Driving without a valid driving license.
- Racing or using the car for commercial purposes.
- Natural disasters in certain geographical regions where the policy does not cover certain calamities.
Example: If you drive your Honda City under the influence of alcohol and crash into another car, your claim for damages might be denied because driving under the influence is an exclusion in most car insurance policies.
13. Third-Party Liability
Third-party liability is a critical component of car insurance, as it protects you if you cause harm to another person or damage their property. In India, third-party liability is mandatory for all car insurance policies and covers:
- Bodily injury or death caused to a third party (someone outside your car).
- Damage to third-party property, such as another vehicle or public infrastructure.
Example: If you accidentally hit a biker on your Toyota Fortuner and cause injury to them, your third-party insurance will cover their medical expenses and compensation for the injury.
14. Total Loss
Total loss refers to a situation where your car is either completely destroyed or damaged beyond repair due to an accident, natural disaster, or other covered events. In such cases, the insurance company may offer compensation based on the IDV of your car.
Example: If your Skoda Octavia is involved in a severe accident and is declared a total loss, the insurance company will compensate you up to the IDV amount, which may be ₹6,00,000 if that is the declared value of the car.
15. Renewal
Renewal refers to the process of extending your car insurance policy after it expires. To ensure that your car remains insured, you need to renew the policy before the expiration date. If you don’t renew your policy on time, your car will no longer be covered by insurance, and you might face penalties for driving without insurance.
Example: If your Volkswagen Polo insurance is set to expire on June 30, you should renew the policy before that date to avoid any lapse in coverage. Many insurance companies offer a grace period for renewal, but it’s always better to do it in advance.
16. Insured Vehicle
The insured vehicle refers to the car that is covered by the insurance policy. It is important that you provide the correct details about your car, such as the make, model, year of manufacture, and other relevant information, to ensure the policy is valid.
Example: When you buy an insurance policy for your Maruti Dzire, the details of the vehicle (including its registration number, engine number, and chassis number) must be accurately mentioned in the policy document to avoid any complications during a claim.
17. Policy Document
The policy document is a legal agreement between you and the insurance company, outlining the terms, conditions, and exclusions of your car insurance. It includes all the details about your coverage, the premium amount, the IDV, the deductible, and any add-ons you’ve opted for. Always read your policy document carefully before signing it.
Example: After purchasing a policy for your Renault Kwid, you will receive a policy document that details everything from the insured amount to the exclusions. Keep this document safe, as it’s needed when making claims or for renewing your insurance.
18. Add-on Covers
Add-ons are extra benefits that you can include in your standard car insurance policy. These additional covers provide more comprehensive protection and can help in specific situations. Some popular add-ons include:
- Roadside Assistance: Helps with issues like flat tires, battery jump-starts, towing, etc.
- Key Replacement: Covers the cost of replacing lost or stolen car keys.
- Zero Depreciation: Ensures that the full value of your car is covered without considering depreciation during the claim process.
Example: If you opt for Zero Depreciation Cover for your Chevrolet Beat, the insurance company will pay you the entire cost of repairs after an accident, without reducing the claim amount for depreciation, making it a more valuable option for new cars.
19. Force Majeure
Force majeure refers to situations where events beyond human control, like natural disasters (earthquakes, floods, etc.), affect the insured car. While most insurance policies cover such events, it’s important to check the specific terms to ensure your policy provides coverage for such situations.
Example: If your Mahindra Thar is damaged in a flood, this event would be considered a force majeure event. However, your policy may or may not cover such damage, so it’s essential to check if flood damage is included.
20. Co-Payment
A co-payment is an arrangement where the insured agrees to pay a certain percentage of the claim amount. This reduces the insurance company’s liability and can lower your premiums. It’s a common practice in health insurance, but some car policies also include co-payment clauses for certain add-ons or benefits.
Example: If you have a co-payment clause of 10% in your Nissan Micra insurance policy, and you file a claim for ₹50,000 for repairs, you will need to pay ₹5,000 (10% of ₹50,000) out of your pocket, and the insurer will pay the remaining ₹45,000.
21. Claim Settlement Ratio
The claim settlement ratio is the percentage of claims that an insurance company settles successfully. A higher claim settlement ratio indicates that the insurer has a good track record of paying out claims. It’s crucial to choose an insurance provider with a good settlement ratio to avoid any hassle when you need to file a claim.
Example: If an insurance company has a claim settlement ratio of 95%, it means they successfully settle 95 out of every 100 claims. If you are purchasing insurance for your Honda Amaze, this high ratio would assure you that your claims will be handled efficiently.
Conclusion
Car insurance is not just a legal requirement but also a critical financial tool that protects you and your vehicle. Whether you’re a new driver or a seasoned one, understanding key terms and coverages is essential for making informed decisions about your car insurance policy. From premiums and IDV to third-party liability and add-ons, each aspect plays an important role in ensuring you have the right coverage.
By considering your car’s value, usage, and your personal needs, you can choose a policy that provides adequate protection and peace of mind. Always read the policy document carefully, understand exclusions, and remember that having the right car insurance coverage is vital for your financial security in case of accidents or unforeseen events.
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