Depreciation in Insurance
Depreciation in insurance reflects how everything loses value over time, including your most prized possessions. When we buy something new, it quickly becomes familiar, losing its novelty.
The monetary worth of items decreases with age, usage, and condition. The more something is used, the less financial value it retains.
What is Depreciation in Insurance?
Depreciation in insurance refers to the reduction in a vehicle’s value over time as its parts wear out. This applies not only to cars but also to assets like phones, laptops, and bikes. Depreciation occurs due to aging and regular use.
For instance, if you purchase an iPhone XS for ₹90,000 today, you wouldn’t expect to sell it for the same price after two years. Its value would naturally decrease, as the phone won’t be as good as new due to usage and wear.
How fast does your car value decrease?
Just like your iPhone, your car’s value also depreciates rapidly. Once you buy a new car, it immediately becomes a used vehicle, and its value drops to around 91% of the original price. The decline in value happens quickly as soon as it’s driven.
The car’s worth continues to decrease with each passing year. A car depreciation calculator typically factors in the following values:
How is Depreciation Calculated in Insurance?
Depreciation is usually determined by assessing an item’s Replacement Cost Value (RCV) and its expected lifespan. The RCV represents the current cost to repair or replace the item with a similar one, while the life expectancy refers to the average duration the item is expected to last.
For example, imagine your car is involved in an accident that significantly damages most of its parts. You bought the car two years ago, and it was in standard condition for its age prior to the accident. An equivalent car today costs ₹6 lakh (this is the RCV). The car has an expected lifespan of five years, which means it loses 20% of its value each year. Since your car was two years old, it had already depreciated by 40% before the accident.
There are two ways depreciation is calculated for your car:
- Overall Depreciation: The moment you drive your new car off the dealership lot, it immediately loses about 5% of its ex-showroom price, and its value continues to decline over time. This type of depreciation is typically considered in cases of total loss or theft.
- Specific Part Depreciation: If your car suffers partial damage, depreciation is calculated on the specific parts that need to be replaced.
Please refer below to understand the percentage rates of depreciation deductions.
Depreciation Deductions
The following depreciation deductions are established by the Insurance Regulatory and Development Authority of India (IRDA):
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Thezipco is not promoting or recommending anything here. Please verify the information before making any decisions.
