What is Zero Depreciation Policy?
Zero Depreciation Policy is when you buy insurance which covers your property on entirety and the coverage doesn’t decrease in value as time passes. So every year your car will have some depreciation, but if there is an accident then you will get the full money recovered from the Insurance provider and they will not deduct the depreciation value of your car.
Zero depreciation policy is the safest kind of policy where the insurer has got the right to claim the full insured value even after the vehicle was used for years and has depreciated in value real terms. So actual depreciation is not considered by the Insurance policy and whenever there is a claim, the insurance company considers the new vehicle value. So this is safe for the insurer as he gets a claim that will help him to either buy a new vehicle or else it can be said that he is not required to add any money from his pocket in case of damage.
Factors to be considered for buying Zero Depreciation Policy
The below-mentioned factors are as follows –
- The premium rate in this policy is high. It is quite logical that if the Insurance company is not considering any depreciation, then they must charge a high premium rate. One must be able to bear a high insurance rate. If a person is too much sure that he will never run into an accident then that person must not go for Zero Depreciation policy and keep on paying high premium year on year.
- It is given by the insurance company only for a brand new vehicle. It is because the owner will be more careful while driving a brand new vehicle than an old one. A brand new vehicle will always have the written-down value equal to the market value. This is because no depreciation has occurred yet. If there would have been depreciation then the written-down value would have been lesser than market value. It makes a safe bet for the insurance company to bet on a brand new vehicle rather than old vehicles.
- As the whole vehicle is insured by the insurance company, so it becomes a habit for the owners to always raise a claim even with a single scratch. So to avoid this, the number of claims is restricted to a certain quantity per year. So now the owners will be more careful with the claims and will act responsibly.
Who is Supposed to buy Zero-Depreciation Policy?
It is said that the Zero-Depreciation policy is usually for the new hands. It means a new driver who is shaky and has got no experience of roads should buy this policy as the premium is high and also the coverage is full. Coverage becomes a satisfactory thing for new drivers as they become confident while driving as someone is there to cover the damage in case something happens.
Having said that it is also not true that experienced drivers are totally safe, they may also run into an accident but the probability of meeting with an accident is more for new drivers.
- The owner will not have to pay a single penny from a pocket as everything is covered. So it is kind of expense is free for the owners. This is the safest insurance and the coverage remains fixed throughout.
- Accounting Depreciation doesn’t act as a burden here. Accounting depreciation slowly acts as an expense in case of normal policy and every policy seller will have their own depreciation rule which gets difficult for the owner to understand. So it gets easy while opting Zero Depreciation policy as the owner is free from the worry of depreciation.
- The Insurance premium is quite high. So it gets really difficult for a person to bear this recurring cost as the cost is high and really starts acting like a burden when it is paid year on year.
- It is perfectly appropriate for new drivers who are not so confident. In the case of old drivers, it feels more like a burden to pay the high premium.
- As the number of claims per year is fixed, so at times genuine claims are also being ignored by the insurance company
Zero Depreciation Policy vs Normal Policy
- Zero Depreciation policy is when the Insurance Company provides complete coverage and doesn’t consider the fact that the vehicle will depreciate with use year on year. Whereas, the normal policy considers that depreciation is the loss of value, so if there is any claim after 2 years then the insurance company will settle claims based on the depreciated value, not on the new purchased value.
- The Insurance premium is very high as they are taking the risk to cover the vehicle without considering the depreciation. So the Insurance Company is considering the vehicle to be new all the time. This scheme is a pain for the insurance company and it comes with a cost. So the premium is charged in the case of Zero depreciation policy is high. On the other hand, the premium charged for Normal Policy is low as this is as per the accounting convention that there is depreciation for any product and the insurance company settles claim based on the depreciated value, not on the brand new value.
Zero Depreciation policy is logical for new users. It gives them confidence as they know that they are covered. One should always consider the trade-off between complete protection and high premium paid. If a user finds it safer to go for complete protection, then they should always go for this policy. An experienced driver may take the risk of not paying the high premium and save money from that as he is confident in his driving.
This has been a guide to What is Zero Depreciation Policy and its Definition. Here we discuss factors to be considered for buying zero depreciation policy along with advantages, disadvantages, and differences from the normal policy. You may refer to the following articles to learn more about finance –