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What is car insurance and why does one need it?

    IndianMoney.com Research Team | Saturday, December 04,2010, 11:12 AM
 

What is car insurance?

In simple terms Car insurance is the protection provided by the insurance companies for the loss against third party liabilities, theft or damage to the car.

Policy coverage

The insurance covers the insured for the loss arising due to :

  • Natural Calamities
  • Man made

Natural Calamities : Fire, explosion, self-ignition, lightning, earthquake, flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost, landslide, rockslide

Man made : Burglary, Theft, Riot & strike, Malicious act, Accident by external means, Any damage in transit by road, rail, inland waterway, lift, elevator or air.

Parties in car insurance

Insured : Owner of the vehicle
Insurer : The insurance company

Types of car insurance

  • Third party car insurance
  • Comprehensive car insurance policy

Third party car insurance

It gives protection against the claims arising due to damages caused by accidents, permanent injury/death, of a person and also any other damage caused to the property.

Comprehensive car insurance policy

Comprehensive policy includes both Third party liabilities and also loss/damage caused to the vehicle by way of accident, theft or any other dangers.

Thus the insured will be reimbursed for the loss/damage to his/her vehicle in the following cases :

  • By fire, explosion, self ignition or lightning
  • By burglary, housebreaking or theft
  • By riot & strike
  • By earthquake
  • By flood, typhoon, hurricane, storm, tempest, inundation, cyclone
  • By accidental external means
  • By malicious act
  • By terrorist activity
  • Whilst in transit by road, rail, inland-waterway, lift, elevator or air
  • By land slide, rockslide

Vehicle valuation

Now the question arises for what value should the car be insured – for the depreciated value or reinstated value. However car need not be insured for any of the above two, it is insured for second hand value in the local market for the similar car and similar model.

Factors determining premium

  • Cubic capacity
  • Year of the car
  • Geographic location
  • Value of the car proposed
  • Cost of the car
  • Age of the driver/buyer
  • Marital status
  • Sex

Reimbursement in event of an accident

In case of an accident the company will repay for the cost of damaged parts which are to be replaced and also the cost of labor. However as per the regulations the company pays certain percentage of the product price and not the whole amount. The reimbursement on parts is subject to the following amount of depreciation

For all rubber/nylon/plastic parts

50%

For fiber glass components

30%

For all parts made of glass

Nil

For all other parts

Age of the vehicle

% of Depreciation

Below 6 months

NIl

6-12 months

5%

1-2 Years

10%

2-3 Years

15%

3-4 Years

25%

4-5 Years

35%

5-10 Years

40%

Exceeding 10 Years

50%

However the company will not be liable to pay in respect of following cases

  • Consequential loss, depreciation, wear and tear, mechanical or electrical breakdown, failures or breakages
  • Damage to tyre and tubes unless the vehicle is damaged at the same time, in which case the liability of the company shall be limited to 50 per cent of the cost of replacement
  • Any accidental loss or damage suffered whist the insured or any person driving the vehicle under the influence of intoxicating liquor or drugs

Personal accident covers for owner driver

Due to bodily injury/death sustained by the owner-driver of the vehicle by violent accidental external and visible means which independent of any other cause shall within six calendar months of such injury results in.

Sl no.

Nature of injury

Scale of Compensation

1

Death

100%

2

Loss of two limbs or sight of two eyes or one limb & sight of one eye

100%

3

Loss of one limb or sight of one eye

50%

4

Permanent total disablement from injuries other than named above

100%

Deductibles

In case of accidents insurance companies do not pay 100% of the expenses, certain amount has to be borne by the insured; the amount borne by the insured is known as deductible. For instance there is a loss of Rs.2000 and the deductible payable by the insured is Rs.500 than the amount payable by the insurance company is Rs.1500. Choosing a deductible is an important part of insurance because this is the cost which the insured has to bear in case of any damage or loss taking place.

Ways to reduce premiums

There are some ways by which premium amount can be reduced by a certain extent :

  • A person can opt for a car that looks good to insurance companies. Generally insurance companies are aware of which type of cars are prone to frequent problems, which are most stolen. The car which does not figure in this list can be bought or the one which has a least risk weightage can be opted for.
  • Generally if a person has more than one car insured and has a record of accident free driving than in this case too premiums charged will be less.
  • By choosing a higher deductible

Documents required for car insurance

  • Drivers license
  • RC book
  • Address proof

Companies providing car insurance

  • Oriental Insurance company
  • New India Insurance company
  • HDFC
  • ICICI Lombard
  • Reliance
  • United India Insurance
  • TATA AIG, etc.

Information needed before applying for insurance

  • Car make and model
  • Registration number
  • Number of years of no-claims discount and with whom
  • Where the car is normally kept - street, garage, etc.
  • Details of other drivers - name, date of birth, license
  • What the car will be used for –personal or business
  • Estimated annual mileage
  • Type of cover – comprehensive or third party
  • Full details of claims or convictions in the last three years.

Steps taken for applying for insurance

  • Lookout for financially sound insurance company
  • Decide on the coverage to be taken
  • Getting the premium rates from different companies
  • Accessibility of the insurer
  • Premium payment options available
  • Receiving the quotes, coverage and deductibles
  • Choosing the right insurance company after deciding on the above parameters
  • Reviewing the policy document

Choosing an auto insurance company

The first step in choosing the right auto insurance company is to decide on the type of auto insurance required. Then one also need to look out if the company gives any discount if a person owns more than one vehicle, since it would be beneficial for both the client as well as the company by transferring all the auto insurance under one company’s product. Another step which can be considered is whether the company rewards the driver for having a good driving record by giving any discounts. Also the person needs to go through the policy document in order to have a better understanding of the insurance product. Also the insurance rates vary from location to location; rates are high in urban areas as compared to those in rural areas or town.

Car insurance particularly third party liability is compulsory in India. Be sure to take a comprehensive auto insurance policy which includes own damages protection. This basically compensates you for the damages your car suffers in an accident.


If your drive carefully and do not get into an accident you will be eligible for the no claim bonus on your insurance policy.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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