Zero Depreciation Policy

A Zero Depreciation Policy is when you buy insurance that covers your property entirely, and the coverage doesn't decrease in value as time passes. So every year, your car will have some depreciation. Still, if there is an accident, you will get the full money recovered from the Insurance provider, and they will not deduct the depreciation value of your car.

A zero depreciation policy is the safest policy where the insurer has 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's 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.

The below-mentioned factors are as follows -

• The premium rate in this policy is high. It is logical that if the Insurance company is not considering any depreciation, they must charge a high premium rate. One must be able to bear a high insurance rate. If a person is too sure that he will never run into an accident, then that person must not go for a Zero Depreciation policy and keep paying high premiums yearly.
• The insurance company gives it only for a brand new vehicle. The owner will be more careful while driving a brand new vehicle than an old one. A brand new vehicle will always have a 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 value 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 ensures the whole vehicle, 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 act responsibly.

It is said that the Zero-Depreciation policy is usually for the new hands. It means a new driver who is shaky and has no experience of roads should buy this policy as the premium is high and the coverage is full. Coverage becomes a good 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.

• It is the safest insurance, and the coverage remains fixed throughout. 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.
• Accounting Depreciation doesn’t act as a burden here. Accounting depreciation slowly acts as an expense in the 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 easier while opting for the Zero Depreciation policy as the owner is free from the worry of depreciation.

• 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. For 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.
• As the number of claims per year is fixed, at times, genuine claims are also ignored by the insurance company.

• A 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. At the same time, the normal policy considers depreciation as the loss of value. Hence, if there is any claim after two years, the insurance company settles it based on the depreciated value, not 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. This scheme is a pain for the insurance company and comes with a cost. So the premium charged in the case of a Zero depreciation policy is high. On the other hand, the premium charged for Normal Policy is low 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.

The 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 a high premium. If a user finds it safer to go for complete protection, they should always go for this policy. An experienced driver may risk not paying the high premium and save money from that as he is confident in his driving.

This article has been a guide to What is Zero Depreciation Policy and its Definition. Here we discuss factors to be considered for buying a 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 –

• Rental Property Depreciation
• Economic Depreciation
• Calculate MACRS Depreciation
• Accelerated Depreciation
• Gross Sales vs. Net Sales