On the right track: 5 myths about IDV in car insurance busted
Buying a car is still one of the most cherished dreams of an average Indian. The automobile industry in the country has seen a definitive growth with models in various sizes and price range appearing in showrooms. As the competition in the market tightens, it has become increasingly difficult to narrow down on the most optimum vehicle for your needs.
The convenience of using your own vehicle for commuting to work rather than a crowded public transport bus is unparalleled. You can also make impromptu plans for a weekend getaway that includes a long drive from the city. The easy availability of car loans has made it convenient to purchase your dream car without having to worry about finances. Banks and non-banking financial institutions have come up with innovative car financing products with affordable equated monthly installments (EMIs) that make buying a car easier than ever before.
When you purchase a vehicle, you should also remember to insure it adequately. Car insurance is a mandatory requirement for all car owners and driving without it is a punishable offense. When you buy a car insurance policy, there are certain things to keep in mind so that you benefit from the most optimum coverage at a reasonable cost.
What is IDV in car insurance?
The jargons and terminologies used in car insurance policy documentation can be very confusing, and one phrase that appears consistently throughout the document would be the Insured Declared Value (IDV).
The Insured Declared Value is the maximum amount you can receive under your motor insurance policy in a total loss scenario such as a car theft. The insurance company decides the premium for insuring your vehicle based on this value, among others. So, it is important that you affix an accurate value for IDV.
There are several myths associated with the IDV in car insurance. Here, we attempt to bust some of them so that you have a clearer picture of the concept of IDV.
Myth 1 - IDV is the maximum claim limit for 1 year
It is often assumed that you can claim up to the value of your IDV in a year, but in reality, it is possible to make an unlimited number of claims annually. If a single claim goes above 75% of the predefined IDV of the vehicle, the insurance company will assume that it is a total loss situation. In this case, you are liable to receive the complete IDV of the car as compensation. But you should remember that total loss claims also mandate that you pay the compulsory deductibles amount.
If the claim amount is less than 75% of the IDV of your car, then you will have to bear the compulsory deductibles and depreciation of replaced car parts.
Effectively, the IDV is the maximum amount you are liable to receive as claim payout under your motor insurance policy. This is comparable to the maximum sum assured in a life insurance policy.
Myth 2 - IDV is decided solely by the insurance company
This is not true at all. The IDV is decided based on the guidelines published by the Insurance Regulatory and Development Authority of India (IRDA). According to these guidelines, the depreciation of car parts is defined up to 5 years of age. Insurance companies also provide the option for car owners to declare higher or lower IDV, provided that the variation is within 10% of the actual figure. When the car gets older than 5 years, there is no fixed guideline for deciding the IDV. It is arrived at based on a mutual agreement between the insurer and the customer.
Myth 3 - IDV is the current price of the car in the market
If you are under the assumption that the IDV of your vehicle is the current price of the model in the market, you are mistaken. In reality, the IDV will be much lower, as there is an element of depreciation associated with the vehicle.
All cars depreciate with age. In fact, a car that has just been driven out of the showroom is considered to have depreciated by 5%. When the market value of your car is calculated, there are several factors that come into play. This includes its depreciation, the resale value of the brand, the performance of the vehicle, etc. So, if you are looking to sell your 5-month old vehicle, you will not receive its invoice value; instead, you will get the market value, which could be much lower.
Myth 4 - It is a good idea to decrease your vehicle’s IDV to save on premium
Declaring a lower IDV to save on premium is not a wise move. The maximum amount you can receive from the insurance company as compensation for a total loss event is its IDV. So, if you have declared a low IDV, you stand to get a lower amount than the actual value of the car. In effect, to save a little on the annual premium, you will be losing out on much more.
Myth 5 - If you declare a high IDV, you will get a better resale value for your vehicle
Declaring a higher IDV than the actual value is not recommended. As indicated above, the market value of a vehicle is not solely based on its IDV. There are several other factors that play a role in determining this value. The resale value of the car is based on its market value. Hence, you may not save as much as you had expected by declaring a high IDV. On the other hand, you will be contributing a lot more towards the car’s insurance premium by doing so.
The best approach would be to decide on an IDV that is closest to the actual value of the vehicle by adjusting its invoice price for depreciation.
Now that you have a better understanding of the concept of IDV in car insurance, you will be better equipped to buy a plan that is suited to your needs.