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 carDepreciation Value Of Your CarDepreciation for cars means a reduction in the value of the cars over the period of its life. On average, most of the value of the car is lost in a period of five years and a nominal scrap value is left.read more.
Explanation
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 real value 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. The claim helps them either buy a new vehicle, or it can be said that they are not required to add any money from their pocket in case of damage.
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Source: Zero Depreciation Policy (wallstreetmojo.com)
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.
- The insurance company gives it 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. It is because no depreciation has occurred yet. If there would have been depreciation, then the written-down valueWritten-down ValueThe Written Down Value method is a depreciation technique that applies a constant rate of depreciation to the net book value of assets each year, resulting in more depreciation expenses recognized in the early years of the asset's life and less depreciation recognized in the later years of the asset's life.read more would have been lesser than the market value. It makes a safe bet for the insurance company to bet on a brand new vehicle rather than old vehicles.
- As the insurance company insures the whole vehicle, 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.
It is also not true that experienced drivers are safe, they may also run into an accident, but the probability of meeting with an accident is more for new drivers.
Advantages
- The owner will not have to pay a single penny from a pocket as everything is covered. So it is kind of expense-free for the owners. It 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.
Disadvantages
- The Insurance premium is quite high. So it gets challenging for a person to bear this recurring cost as the cost is high and 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, at times, genuine claims are also 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. Hence, if there is any claim after 2 years, the insurance company settles it 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 conventionAccounting ConventionAccounting conventions are specific guidelines for complicated and unclear business transactions, not compulsory or legally binding, but these generally accepted principles maintain consistency in financial statements. These conventions help in standardizing the financial reporting process, disclosure of transactions, and relevance.read more that there is depreciation for any product, and the insurance company settles claim based on the depreciated value, not on the brand new value.
Conclusion
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.
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