Dalal Street Investment Journal

Speed Breaker Ahead! What To Look Out For In Car Insurance

KEY POINTS

Free insurance, which is one of the most attractive freebies, is typically provided for only a year, after which the policyholder has to renew the policy and pay the premium. Moreover, free insurance would mean a lesser discount on the price of the car, as dealers invariably recover the premium through the final cost that you pay.

The No-Claim Bonus (NCB) clause can help you bag a discount of 20-50 per cent on your premium from the second year onwards. However, this advantage is lost once a claim is made, and hence, one should avoid making claims when the amount is lower than your premium.

Deductibles are part of the monetary loss that is borne by you when you file an insurance claim. This has two components – compulsory and voluntary. If you feel you are a good driver, you could opt for a voluntary deductible to save on the premium.

The higher the Insured Declared Value (IDV) of your car, the greater the premium. You can save a few hundred rupees on your premium by declaring a lower value. However, the claim amount for accidents will not be affected by declaring a lower IDV. Further, doing this works against you if your car is stolen, as you will get a lower amount in line with the value you declared.

Car insurance is something of an opaque subject. We know we have to pay the bill but may have no clue as to how the insurance company arrived at that rate. Cable companies are widely criticised for their hidden charges, but at least these are on the bill. The hidden fees on your car insurance bill remain hidden – an amount is spelled out and you are expected to pay, no questions asked.

Here are some important things to be in the know of so that you are not caught unawares:

A) If you have been planning to buy a new car, you would surely have been lured by a plethora of discounts and freebies. Since buying a car insurance policy is compulsory, free insurance is one of the most attractive freebies. However, watch out for hidden clauses.

For starters, remember that free insurance is provided typically for only a year. From the second year onwards, the policyholder has to renew the policy and pay the premium. Moreover, free insurance would mean a lesser discount on the price of the car, as dealers invariably recover the premium through the final cost that you pay. Besides, the free policy may not cover additional features such as cover on losses caused by floods. So, read the fine print carefully before you sign up. Alternatively, you could opt for a higher discount on the car and buy an insurance policy separately.

In the whole process, research and good negotiation can help you reduce the insurance premium you may have to pay for the first year as well as subsequently.

B) No-Claim Bonus (NCB) is the reward you get for not making any claims on your insurance policy throughout the year. This can help you bag a discount of 20-50 per cent on your premium from the second year onwards. However, this advantage is lost once a claim is made, and hence, one should avoid making claims when the amount is lower than your premium.

The NCB can be transferred from an old vehicle to a new one as it gets accumulated for the driver, not the vehicle. By carrying forward your NCB to a new vehicle of the same type, you can cut the first premium substantially.

C) The premium charged for a car may differ according to the profile of the owner. Insurers adopt many parameters to evaluate the risk associated with vehicles including fuel type, age of the vehicle, usage of the car, as well as driver-specific details such as the driver’s occupation and age. A diesel-run car is assumed to be used more often than a petrol one, so the premium charged for it would be higher by 12-15 per cent. Similarly, it is assumed that a businessperson would use his/her car more frequently, and hence, the insured would be charged a higher premium.

Voluntary declarations about the usage of your car as well as other details like driving records can help you get a discount of around 10 per cent.

D) You can also lower the premium by up to Rs 200 if you come under the 'safe driver' category. One way of doing this is to become a member of the Automobile Association of India. Installing safety devices can also bag you Rs 100-200 discount on your premium.

E) Deductibles are part of the monetary loss that is borne by you when you file an insurance claim. This has two components – compulsory and voluntary. A compulsory deductible of Rs 500 would mean that you pay Rs 500 of the claim amount and the company pays the rest.

You can reduce the premium if you opt for an additional voluntary deductible. However, this also means that when a loss occurs, you will have to pay a large portion of the claim amount out of your own pocket. For instance, a voluntary deductible of Rs 2500 would give you a 20 per cent discount on your premium, but when an accident occurs, you will have to pay Rs 3000 of the claim amount (voluntary deductible of Rs 2500 plus the compulsory deductible of Rs 500).

If you feel you are a good driver, you could opt for a voluntary deductible to save on the premium.

F) The Insured Declared Value (IDV) is the market value of your car. The higher the value, the greater the premium. You can save a few hundred rupees on your premium by declaring a lower value for your car. If your car is worth Rs 7.4 lakh, declaring a value of Rs 6.5 lakh could help you save Rs 200-500 on insurance premium.

However, the claim amount for accidents will not be affected by declaring a lower IDV. Further, doing this works against you if your car is stolen, as you will get a lower amount in line with the value you declared.