How Is Car Insurance Premium Calculated?

How Is Car Insurance Premium Calculated?

To secure oneself from a car mishap, one needs to buy car insurance. It not only assures financial security in dire situations but also provides a sense of security. While the benefits of car insurance are plenty, you must know about the cost of purchasing an insurance policy.

With that in mind, here are some essential factors that impact car insurance’s premium:

  • Insured Declared Value (IDV)

In simple words, insured declared value or IDV is the estimated financial value that an insurance company sets for your car. The IDV is set at the time of application of insurance, and it determines insurance coverage.

For example, your car’s insured declared value is Rs. 5 lakhs. If you meet with an accident and the car gets damaged. In such a case, the insurance company is liable to only cover your damages up to the IDV amount and not more than that.

Another factor that influences the insured declared value is the depreciation that occurs over the years. A brand-new car’s insured declared value will be higher than a seven-year-old vehicle with 40,000 km on it. Insured declared value is subject to depreciation, and it will be adjusted based on that factor.

  • Car’s cubic capacity

The cubic capacity is another major factor that affects insurance premium. Cubic capacity is the measurement of the engine size of a car. It plays a significant role in determining third party insurance cover. Its premium never changes as the capacity of the engine is not subjected to age or depreciation. Hence, it is not used to calculate a comprehensive insurance policy.

However, the premium amount depends on the capacity of the engine. The premium’s rise is directly proportional to the increase of the engine’s CC. The Indian Motor Tariff Act set the rules and regulations for it.

  • Car’s age

As the years go by, your car will lose value due to different reasons such as depreciation, availability of newer models, safety features in them, etc. Insurance companies determine the value of a car based on a specific schedule, and that is how they conclude as to how much the insurance amount will be. However, for cars that are more than five years old, the insurer and insurance provider can mutually conclude the car’s value. Things considered for a proper evaluation are depreciation schedule and the car’s condition. Based on it, the premium amount will be calculated. 

  • Car’s geographic location

A car insurance package also depends on the location of registration. Car owners from zone A cities such as Mumbai, New Delhi, Chennai, Bangalore, Pune, etc. must pay a higher premium compared to cars registered in zone B cities. 

These are a few factors that impact a car insurance cover and its premium. You can also use the car insurance calculator to determine the premium amount for your insurance. The tool is easy to use, you must enter the details like the insurance amount, tenure, and the rate of interest, and the tool will compute the amount within few seconds. Also, another significant benefit of using the calculator is that it eliminates the risk of human error and provide the accurate figure. 


Edward Powell