Here’s Why IDV is Important in Car Insurance

Is your car insurance renewal due? If yes, then you should be careful of various offers driving from the different insurers. Online comparison of car insurance is not an alien term for most of us. But you should be cautious while doing it. Bear in mind that the insurance provider may offer a lower premium but at the same time may settle for a lower IDV (Insured Declared Value). If your car insurance renewal date is due and if you want to try some other plans, you ought to know about IDV. And not considering it, you may end up doing a blunder!

Decoding Insured Declared Value

Insured Declared Value or IDV is the maximum sum insured agreed upon by the insurance provider. It is the insured amount up to which damages to the vehicle are paid. Additionally, IDV is the current market value of the insured vehicle. The insurer decides this value on the basis of the vehicle manufacture’s current value and depreciation with the age of the vehicle. That’s why you should evaluate the offered IDV carefully in case the brokers, agents or aggregators offer varied IDV quotes.

For instance, at the time of purchasing car insurance if the insurer decides your car IDV for Rs. 5 lakh, then the insurance provider will compensate the maximum of Rs. 5 lakh in case of an eventuality resulting total loss or theft of the insured vehicle. However, anything beyond this limit will be paid by the vehicle owner only.

As your comprehensive car insurance covers own damage and third-party risk, this policy is optional as well. However, the third-party car insurance is mandatory and the premium is decided by the IRDA only. On the other hand, the OD premium is decided based on the ODV of the vehicle.

What is the Importance of IDV?

No doubt that the IDV is an important aspect to be considered while buying a car insurance plan. It is the most important factor for calculating the premium of comprehensive car insurance. Since the coverage offered under this policy is comprehensive in nature, which includes damages due to accidents, natural or man-made calamities, the OD premium is calculated based on the IDV.

However, same is not the case with the third party car insurance, where the premium is calculated on the basis of the make and model of the vehicle. There is no impact of IDV on the premium in case of Third party insurance as it is pre-decided by the IRDA. On the other hand, IDV has a direct impact on the OD premium as the depreciation keeps increasing with the age of the vehicle.

Though a brand new car has higher IDV when it ages, the depreciation rate increases and so the IDV lowers. A vehicle starts depreciating its value by 5% within six months from the date of purchase and it reaches 50% within 5 years.

So, higher the IDV, higher will be the car insurance premium and when the IDV is lower, you would pay a lower premium. However, one should not consider a plan based on the premium only. It is recommended to opt for a plan that suits your insurance requirement, no matter if you have to pay slightly a higher premium.

The Process of Calculating IDV

IDV is calculated at the time of selling a policy. Manufacture’s listed selling price of the vehicle is the main factor on the basis of which the IDV is calculated. Moreover, the car model is also considered. This amount is further adjusted with the depreciation rate of the vehicle predetermined by the Motor Vehicles Act. The moment a car is out from the showroom, the IDV starts to go down. It depreciates by 5% within 6 months of the purchase. Hence, the maximum IDV will be 95% of the ex-showroom price of the car. Let’s consider the below table to understand the depreciation with age to calculate IDV:

 Vehicle Age Depreciation (%) 
Not more than six months 5%
Exceeding six months but not more than 1 year 15%
Exceeding 1 year but not more than 2 year 20%
Exceeding 2 years but not more than 3 year 30%
Exceeding 3 years but not more than 4 year 40%
Exceeding 4 years but not more than 5 year 50%

The Formula to Calculate IDV

IDV = {[(Listed selling price of the manufacturer or Ex-showroom price of the car) + (Sales Tax) + (Accessories excluded in the listed selling price – depreciation)] – (Depreciation + Costs of registration + Car Insurance costs)}

Calculating IDV for Vehicle More than 5 Years Old

In case of an obsolete car model, which is discontinued by the manufacturer, the IDV is calculated based on the mutual understanding between the policyholder and the insurance provider. This happens with the cars that are more than 5 years old. In such a case, the insurer prefers a thorough inspection of the vehicle to decide an IDV.

When You Declare a Lower IDV

This is a common misunderstanding that you should declare lower IDV in order to reduce premium. Although it is true, but there is a catch to it.

When you declare a lower IDV for the vehicle, you may end up receiving a lower claim amount, as the IDV is lower. In such cases, if there is a total loss or theft, the excessive amount has to be shell out from your pocket. On the other hand, if you declare a higher IDV believing that the insurer will settle for a higher claim amount for total damage or theft, remember that the insurer will decide the IDV on the basis of the age of the vehicle or depreciate the value while computing a claim. Therefore, you may receive a lower amount in case of total loss despite declaring a higher IDV and higher premium. Given that, you should consider these things at the time of renewing car insurance policy.

Why you should consider IDV while Renewing Car Insurance?

The features of car insurance, even the premium should necessarily change every year. That’s why you should not simply agree to pay whatever the insurer asks for. Check the IDV first and compare the premium online. You may find a better deal with another insurer well within your budget. You can negotiate the figures as well. However, cheap is always not the best. So make sure, you opt for a cover that is as per your requirements and perfectly fits your budget.

Also, car insurance renewal is the best time to evaluate your vehicle IDVs. You already know the premium will be calculated based on the current value of the vehicle. In case your car has a higher market worth, you may have to pay a higher premium or vice-versa. This is the right time to adjust the IDV as well by increasing or lowering it. This can be done conveniently if you opt for online insurance or renew the policy online.

Wrapping it up!

We hope that this information is enough to make you realise the importance of IDV in car insurance or at the time of calculating your premium. Hence, it goes without saying that if you renew your car insurance policy for the first time or if you are buying a new one, ensure that the IDV of the vehicle is calculated adequately and is at per the age of the vehicle. This is the ideal way to avoid any surprises at the time of claiming car insurance.

While renewing a plan or calculating the premium using a car insurance premium calculator, you may find plans with a lower premium as well. There is no harm in going for these plans. Just make sure you are fully covered for the risks. This will help you avoid any future surprises at the time of claim when you need your insurance at the most.