Should You Take the Zero Depreciation Add-on in the First Year?


Take the Zero Depreciation Add-on in the First Year

Many of us are wondering whether it is relevant and important to take zero depreciation cover in the first year for the vehicle. Depreciation refers to the reduction in the value of the asset over a period of time due to the general wear and tear of the asset. Depreciation could happen both due to time as well as the use of the vehicle.

A vehicle that is not used for a certain period of time would still be depreciated in the vehicle as the depreciation is irrespective of the time and usage. It is impossible to determine the depreciation based on the usage of the vehicle as it varies from one vehicle to another. One person might have used the vehicle very much, whereas the other might have used it sparingly. So, as far as motor insurance is concerned, depreciation not only impacts the selling price of the vehicle, but it also impacts the insured declared value or the IDV.

The concept of depreciation comes into play at the time of claim settlement, which takes into account the time of usage of the vehicle. For example, your car has met with an accident and needed repairs or replacement of certain parts for which the garage has calculated the total claim value as Rs.1 Lakh. Now, the insurance company would decide on the depreciation amount depending on the type of part damaged.

Depreciation would be applicable only in case of replacement and not in case of repair of any part. For example, the front part of the car is damaged and it includes many parts and materials such as Rubber, Nylon, Plastic, battery and other fibreglass components, including the glass window. Now, the depreciation would be calculated differently for different items as mentioned below:

  • Rubber, Plastic spares and Nylon parts have a 50% depreciation rate 
  • Batteries and air bags have a 50% depreciation rate
  • Fiberglass components have a 30% depreciation rate
  • Glass components have a 0% depreciation rate
  • For paint jobs, a 50% depreciation rate is applied to the material cost of the paint. 

One may assume that the vehicle parts might not be depreciated so much in the first year and hence, there is no need to take the zero depreciation cover. Still, the fact is that there would be some depreciation even in the first year, which would be taken into account at the time of claim settlement.

The depreciation rate would increase with an increase in the age of the vehicle, but it is also important to note that there would be a 5% depreciation in the first year of the vehicle. This 5% might seem minimal at first glance, but it depends on the cost of the spare parts that are to be replaced due to an accident. For example, let us consider an engine part of an entry-level car which would cost around Rs. 50,000 was damaged and 5% depreciation would amount to Rs.2500. The depreciation add-on would have been less than or similar to the depreciation amount and had you taken the add-on you could have saved this amount.

There would be consumable expenses that are to be borne by the insured customer in the absence of Zero depreciation and Consumables cover. Consumables cover is usually given with Zero depreciation cover. With a zero depreciation cover, one can take a consumable cover, making them vulnerable to spending more from their pockets.

Here Are the Rates of Depreciation Applicable for All Other Parts of the Vehicle Including Wooden Parts:

Age of the Car/VehicleRate of Depreciation (in %)
Not exceeding 6 monthsNil
Exceeding 6 months but not exceeding 1 year5%
Exceeding 1 year but not exceeding 2 years10%
Exceeding 2 years but not exceeding 3 years15%
Exceeding 3 years but not exceeding 4 years25%
Exceeding 4 years but not exceeding 5 years35%
Exceeding 5 years but not exceeding 10 years40%
Exceeding 10 years 50%

Hence, if the car’s age is more than 10 years, a flat depreciation rate of 50% would be applied to all parts. This table indicates that the depreciation rate would increase each year for up to 10 years, after which it would become stagnant.

So, it is advisable to take zero depreciation add-on even in the first year. The other thing to note is that if the zero depreciation add-on is not taken in the first year, most insurance companies would ask for pre-inspection at the time of renewal. If there are any existing damages, it will become difficult to get the zero depreciation add-on as the insurance companies anticipate the customers to claim for previous damages in future claims.

Difference Between Invoice Cover and Zero Depreciation?

One might question the need to take zero depreciation cover when there is an invoice or return to invoice cover in place. Return to invoice cover is applicable only in case of total loss or constructive total loss. Constructive total loss refers to the condition where the vehicle is severely damaged beyond repair and the repair cost would exceed the insured declared value (IDV) of the vehicle. Therefore, it is not viable to repair the damaged vehicle.

Total loss refers to the complete loss of a vehicle, i.e., beyond repair. Robbery or vehicle burning to ashes comes under total loss. The return to invoice cover would be applicable only when the vehicle undergoes total loss or constructive total loss and not for small repairs. A zero depreciation cover would be applicable in case of repairs or replacement of parts. It is possible to restore the vehicle’s condition just before it was due to the occurrence of the loss. Moreover, zero depreciation is given up to 7 years of vehicle age, whereas the return to invoice cover is given for up to 3 years.

For example, if your vehicle has met with an accident and the garage quoted Rs.5 Lakhs as repair cost when the IDV is Rs.3 Lakhs, in which case the vehicle is termed as constructive total loss and would be settled as per the terms and conditions of the policy. If return to invoice cover is taken, then the insurance company would provide the invoice value of the vehicle, whereas if depreciation cover is taken, then the company would pay the IDV as the claim amount.

If both the invoice and zero depreciation cover are taken, then invoice cover would come into the picture first, as it would benefit the insured most compared to the zero depreciation cover. There would not be an instance where the insured would benefit from the insurance policy, even in case of total loss or constructive total loss. To ensure the insured does not benefit from an insurance policy, insurance companies would fix the invoice value similar to that of the Insured declared value (IDV) in most cases. In any case, the insured declared value is the maximum amount that would be paid to the insured in case of loss to the vehicle.
For more details on the zero depreciation add-on and other add-ons in vehicle insurance, please book a call with our insurance executives at Ethika Insurance.

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Susheel Agarwal

Namaste. I'm Abhinay Nedunuru, a Fellow of the Insurance Institute of India with a passion to make insurance simple and crisp. I write on insurance and investment. I have a passion for teaching and training in particular to insurance. I'm currently doing my PhD from IIM in Management.