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Do you know What Makes Up Your Typical Car Insurance Premium?

So, you purchased the comprehensive vehicle insurance policy as is required by the law at the time that you purchased your car. That said you also dutifully pay your insurance premiums. But do you know what is it that makes up the very same car insurance premium that you are so prompt about?

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One of the cardinal rules for any type of car insurance is to first maintain a valid driving license and a valid insurance policy. And the easiest way to keep an insurance policy valid, and safe from lapsing, is by making regular premium payments. Contrary to the popular adage, that is easier done than said.

Are you aware of what makes up your car insurance premium?

In fact, very few people, even ones who are most prompt about purchasing insurance for their possessions and diligent in making insurance premium payments, know the components of the same insurance premium payments. The number of variables affecting the car insurance premium makes it, like most other insurance products, quite a complicated equation to understand while purchasing. Over the years, however, it has been noticed that there are chiefly three main components that form the basis of a regular comprehensive car insurance policy premium.

The main aspects of a car insurance policy premium

The three chief components of the comprehensive car insurance premium are Third Party (Liability) Cover, Own Damage (OD) Cover, and Personal Accident Cover. Let’s take a closer look at each of these components.

Before you read any further, watch this simple video on Components of Car Insurance Premium, to get your basics right!

Third Party (Liability) Cover

The owner of the vehicle is legally liable for any injury or damage to third party life or property caused by the use of the vehicle in a public place. Driving a motor vehicle without insurance in a public place is a punishable offence in terms.

In case of an accident that results in grave financial damage or fatalities for the third party, the Third Party (Liability) or TPL is the only cover that comes between the owner/driver and financial and legal despair. The compensation sought by the aggrieved party in such a scenario is fully paid by the insurer.

The TPL policy covers:

  • Death or bodily injury to the third party,

  • Damage to third party property,

  • Death of the insured vehicle owner or driver,

  • Permanent Total Disability of the insured vehicle owner or driver.

It is noteworthy that this compensation can be quite a large amount, especially if the aggrieved party makes a claim for compensation under the ‘fault liability’ of the Motor Vehicles Act 1988. If they are able to establish that negligence in driving by the first party (you or the person who drove your car) resulted in bodily injury or loss of life for them, they can actually claim unlimited compensation. Even in the case of damage to their property, the insurer’s liability can go up to about Rs. 7.5 lakh.

It is for this simple reason that in India, it is mandated by law to have TPL cover for every vehicle. An important point is that TPL, however, does not provide coverage for own damage (that is the first party—you, your driver, passengers or your car). Therefore, while TPL is a sound decision given the state of affairs of our roads, it is only sensible to opt for a policy that offers coverage to also take care of losses from damage repairs to your own vehicle.

The Insurance Regulatory and Developmental Authority of India (IRDA) has laid down the TPL cover premium. In March 2015, the regulator had increased it by 14-30 percent, with the actual premium being calculated based on the car engine capacity (CC).

Own Damage Cover

The Own Damage (OD) cover is a highly beneficial yet optional cover that will compensate you in case your own car is damaged due to an accident or any natural or man-made calamity.

The sum insured under an OD car insurance policy reflects the value of the vehicle established by the equation called the car’s Insured’s Declared Value or IDV. IDV is the value of the motor arrived at based on the manufacturer’s present value and depreciation based on the vehicle’s age.

The premium for OD cover is calculated as a percentage of IDV and is approximately about 2-3% of the IDV depending on the age and cubic capacity of the vehicle. Remember that greater the IDV, higher the premium and vice versa.

Getting an IDV that is close to the market value of your car is always the best bet. Decreasing the IDV value will result in lower premium but it also provides you with a lower coverage than is required. As your car grows older, the IDV decreases.

Here is a schedule of depreciation for arriving at a car’s IDV.

Age of Vehicle % of Depreciation for calculating IDV
Upto 6 Months 5%
6 Months to 1 Year 15%
1 Year to 2 Years 20%
2 Years to 3 Years 30%
3 Years to 4 Years 40%
4 Years to 5 Years 50%

The IDV of old vehicles (that is, of above five years of age) is calculated by mutual agreement between insurer and the insured. Instead of depreciation, IDV is then arrived at by assessment of the vehicle’s condition and carried out by the dealers or the insurance surveyors.

Personal Accident Cover

Finally, there is the Personal Accident or PA Cover component of your car insurance premium. The PA cover provides relief in the unfortunate and unforeseen event of the first party meeting with a fatal accident or being rendered disabled in whatever capacity. Under the policy, most risks related to accidents such as burns, broken bones, disability or deaths are covered. The need of the cover is such that the law compulsorily statutes that PA cover is provided to the owner-driver. There is the optional provision in the PA policy by which you may increase the sum insured and also provide for other passengers. As always, higher the sum insured, higher is the premium.

Is Service Tax applicable for insurance premiums?

Yes, service taxes are applicable as per the prevailing rule of law for motor insurance premiums. They will differ from cover to cover.

Knowledge is key – especially with regard to motor insurance premiums

We hope this article holds you in good stead and you are no longer mystified by the calculation of your car insurance premium. At the time of purchase/renewal of policy, always pay heed to the fine print before writing the cheque; that is the portion that usually deals with the numbers and percentages.

If you liked this blog post, visit the Coverfox blog regularly to read more interesting articles. We can also calculate your estimated car insurance premium online. Click here to calculate your car insurance premium.

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Meeta Sabnis
Written by Meeta Sabnis
Her mantra in life is to dream, and dream until you turn them into reality. A neurotic Kajol fan, Meeta loves spending time with her gorgeous twins, ensuring a childhood they’ll be proud of. Bargain hunting, crazy dancing and romancing alphabets are some of her other cravings. She’s currently a Content Writer at Coverfox.

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