Have you ever wondered why your insurance claim payout is lower than expected? The reason often lies in a crucial but overlooked factor—depreciation.
When you file a claim, insurers reduce the compensation based on the wear and tear of the insured item. Whether it’s a vehicle, home, or equipment, depreciation directly affects the claim amount, leaving policyholders frustrated and financially burdened. In this blog, we will demystify depreciation in insurance policies in India, explaining how it’s calculated, its impact on claims, and how you can minimise losses. By the end, you will have a clear understanding of depreciation clauses and ways to ensure better claim settlements. Stay tuned!
What is Depreciation in Insurance Policies in India?
Ramesh had been a careful planner all his life. He had insured his car, home, and belongings, thinking he was financially secure in case of unexpected damages. But when he filed an insurance claim after a fire damaged his house, he was shocked to see the insurance company deduct a significant amount citing ‘depreciation.’
If you have ever faced a situation like Ramesh’s or want to ensure you are better prepared, let’s break down depreciation in insurance policies in India.
Depreciation is the reduction in the value of an asset over time due to wear and tear, age, or obsolescence. In insurance, depreciation directly affects the amount an insurance company pays when settling a claim. Whether it’s a vehicle, home, or any insured item, the longer you own it, the lower its value becomes. Insurers apply depreciation to calculate the actual cash value (ACV) of an asset, which determines the claim payout.
Why do insurers use depreciation? The logic is simple: assets lose value with time. A home built ten years ago is not worth the same as one built today. Similarly, furniture, electronics, and even health-related equipment depreciate. By factoring in depreciation, insurers ensure that policyholders do not receive more than the current market value of their insured asset.
How is Depreciation Calculated in Insurance?
Depreciation rates vary based on the type of insurance policy and the asset covered. To calculate the depreciation rate, insurers consider factors such as:
- Age of the asset
- Usage frequency
- Maintenance condition
- Technological or market obsolescence
For instance, in property insurance, depreciation on items such as furniture, electronics, and structural components follows a specific structure. Let’s consider an example:
Example: Suresh owns a 15-year-old house that recently suffered fire damage, requiring repairs amounting to ₹10,00,000. The insurance company assesses the claim as follows:
- Structural repairs (₹7,00,000) – 30% depreciation → ₹4,90,000 eligible
- Furniture (₹2,00,000) – 50% depreciation → ₹1,00,000 eligible
- Electronics (₹1,00,000) – 40% depreciation → ₹60,000 eligible
Total payout = ₹6,50,000 after depreciation deductions.
If Suresh had a reinstatement value policy for the building structure, he could have received the full ₹7,00,000 for structural damage. However, reinstatement value typically does not apply to movable contents unless explicitly covered.
Depreciation Rate in Different Types of Insurance Policies
A. Property Insurance
Homes and commercial properties depreciate over time, and insurers apply depreciation while settling claims. The structural components of a building—such as walls, flooring, roofing, and electrical systems—gradually lose value. Furniture, appliances, and fixtures also depreciate based on their material and usage.
B. Motor Insurance
Car owners often face depreciation deductions while claiming insurance. The Insurance Regulatory and Development Authority of India (IRDAI) has standard depreciation rates for vehicle parts, including metal, plastic, and rubber components. To counter depreciation losses, policyholders can opt for zero depreciation add-ons, which ensure full reimbursement for repairs.
C. Health Insurance
Depreciation is generally not applicable to routine hospitalisation claims under standard Health Insurance plans. However, in certain cases—such as claims involving durable medical equipment (DME) like prosthetics, implants, or mobility aids—depreciation might be considered if not fully covered under the plan. These instances are rare and usually occur in personal accident policies or specialised health riders.
Zero Depreciation Cover – A Game Changer
Zero depreciation, also known as bumper-to-bumper coverage in motor insurance and reinstatement value cover in property insurance, ensures the insurer pays the full cost of repair or replacement without factoring in depreciation.
Let’s revisit Suresh’s case. If he had opted for a reinstatement value policy for the structure, his insurer would have covered the full ₹7,00,000 worth of repairs. However, these policies come at a higher premium.
Who should opt for it?
- Homeowners who want maximum repair or replace coverage for property damages
- Owners of new homes or recently renovated properties
- Policyholders looking to minimise out-of-pocket expenses during claims
Although slightly more expensive, a reinstatement value policy provides peace of mind and better financial security during claims.
How to Minimise Depreciation’s Impact on Insurance Claims
- Choose the Right Insurance Policy: Opt for policies that provide comprehensive coverage. In property insurance, a reinstatement value policy is highly recommended.
- Maintain Your Assets Well: Whether it’s a vehicle, home, or appliance, good maintenance slows down wear and tear, preserving its value.
- Understand Policy Terms: Before purchasing an insurance policy, read the fine print to understand depreciation clauses and their impact on claims.
- Negotiate with Insurance Company: Sometimes, insurers allow minor adjustments in depreciation rates if you can provide documentation showing better asset conditions.
Importance of Depreciation in Insurance
Depreciation plays a crucial role in insurance policies in India, particularly in motor insurance, health insurance, and property insurance. It determines the reduction in the market value of an asset over time due to wear and tear, usage, or obsolescence. Here’s why depreciation is important in insurance in India:
- Affects Claim Settlement Amount
Insurance companies deduct depreciation from the claim amount while compensating for damages or losses. This ensures that policyholders receive compensation based on the asset’s current market value rather than its original purchase price. - Influences Premium Calculation
While depreciation doesn’t directly set your premium, it influences the insured declared value (IDV) in motor insurance and the sum insured in property insurance. Assets with higher depreciation typically result in lower IDV or sum insured, leading to lower premiums—but also lower claim payouts. - Impacts Motor Insurance Claims
In vehicle insurance, depreciation applies to parts like plastic, rubber, and fibre components. Standard insurance policies pay the depreciated value unless a zero-depreciation add-on is purchased, which ensures full reimbursement without depreciation deductions. - Affects Property and Home Insurance
For home insurance, depreciation is applied to building structures and contents such as furniture, appliances, and electronics. The claim amount is settled based on the asset’s depreciated market value unless a reinstatement value policy is in place. - Influences Health Insurance Claims
In health insurance, depreciation plays a role only in specific cases involving equipment like prosthetics, implants, and artificial body parts. These are usually covered under personal accident plans or specialised riders, and may have limited coverage if depreciation is applied. - Encourages Policyholders to Opt for Add-ons
To minimise the impact of depreciation on claim settlements, insurers offer add-ons like zero depreciation cover in motor insurance and reinstatement benefits in property insurance. This encourages policyholders to enhance their coverage. - Ensures Fair Compensation
Depreciation prevents overcompensation in claim settlements, ensuring that policyholders receive an amount that reflects the current market value of the insured asset rather than its original cost.
Thus, understanding depreciation in insurance policies helps policyholders make informed decisions regarding coverage, add-ons, and claim expectations.
Final Thoughts
Depreciation is an unavoidable aspect of insurance claims. While it ensures fair valuation for insurers, it can sometimes leave policyholders with lower claim payouts than expected. Understanding how depreciation works—and exploring options like zero depreciation covers, reinstatement value policies, or relevant add-ons—can help you make smarter insurance decisions.Whether you are insuring a home, vehicle, or health-related equipment, staying informed can help you maximise your claim benefits and minimise losses.
Like Ramesh, many policyholders learn about depreciation the hard way. But with the right knowledge, you can navigate insurance policies effectively and ensure you are not caught off guard when filing a claim.
