An old car is always valued less than a new one while buying and reselling. This is due to the depreciation of car components over the years, as they have a limited lifespan. So, depreciation is a factor that affects the monetary value of your car due to the natural wear and tear as you use it.
Since the cost of your insurance policy or premium depends on the car’s value; thus, when the value of your car depreciates, the premium of your car insurance also reduces. This implies that if you make a claim, the car insurer will deduct the depreciation amount from the total claim amount payable, and you will receive compensation lower than the car’s actual value. However, the solution to this is opting for a zero-depreciation car insurance add-on.
Now, let us understand with the help of an example:
Consider person A bought a new car worth Rs. 5 lakhs. They paid Rs. 10000 as a premium for their car insurance policy in the first year.
Now, after one year of using the car, due to the normal wear and tear of its components, the car’s value has reduced to Rs. 4 lakhs and the cost of the insurance policy has dropped to Rs. 8000 in the first year. This will continue with each passing year.