Why does buying automobile insurance feels like dealing with a black box?

There is a lot more to insurance than meets the eye

The word insurance in its simplest form conjures the vision of protection.
Well at least that is the idea if you are new to the world of insurance or are not used to the fine print of what an insurance offers.

Understanding insurance is not always easy

For one there are so many kinds of insurance covers that it is confusing to say the least.
The jargon is not always easy to understand and the features are never mentioned clearly by the agent trying to sell you the insurance cover.

Why buy the insurance in the first place?

The short answer is that it is mandatory to have automobile insurance before you take it for a spin on the road or step out with your new set of wheels out of the showroom.
Not having insurance means you can be levied a heavy fine.
The onus of buying insurance falls on the owner of the vehicle in whose name the automobile is registered.
Besides the mandate which may or may not be present in which jurisdiction you are driving the vehicle, the other big reason for getting the insurance is the financial protective cover you get for your vehicle.
Let us see who is covered by automobile insurance. Suppose you have a third part cover. In case such a vehicle is involved in an accident with a person the insurance would cover the damage cost incurred by this person referred to as the third party.
Your damage cost would have to be borne by you.
In case of a comprehensive insurance policy your damage is covered as well.

How much damage is covered?

When the car is new it is insured for the entire cost of the new vehicle.
In the insurance jargon the cost for which a vehicle is insured is referred as the IDV or the indemnity value of the vehicle.
Every year the cost of the vehicle goes down due to depreciation and as a result the IDV too goes down.
As a thumb rule the rate of depreciation is 10% so this is the amount by which the value of the vehicle goes down every year.

How much does it cost to get an insurance cover?

The answer again boils down to who is covered and to what an extent.
At times buyers get additional fittings done to their automobiles and covering them can raise the premium of the insurance policy.

How often does one need to pay the premium?

Most automobile insurance policies charge an annual premium and the owner is technically required to renew the policy before it expires.

Why does the premium vary from year to year?

Since the value of the vehicle and the IDV or indemnity value does go down year after year due to depreciation therefore the premium also goes down.
However do note if the IDV is less so is the premium and so is the coverage.

Is the entire car and its parts covered in the policy?

This is an extremely valid question which one must ask the company before we buy its policy.A lot of companies would deduct some amount before they settle the insurance amount.
Things like tyres or glass parts may not be covered in the insurance you buy.

Why does buying insurance feels like dealing with a black box?

Simply put there are so many clauses and sub clauses and for the simple layman the term coverage can be misleading.
Take for instance the automobile policy I came across for a car that is ten years old.
The car is insured for about $1200 so this may give the impression if the car suffers any damage or loss the owner would be entitled to $1200 compensation.
The answer is no. Even though the coverage on the car is for $1200 and the owner paid a premium accordingly the insurance sees the car in a very different way.
For them the car is sum of parts made up of metal, rubber, plastic, fiberglass, batteries and glass.

• For all rubber/ Nylon plastic parts and tyre and tube, batteries and air bags the coverage is 50%
• For fibre glass components the coverage is 30%
• For parts made up of glass the coverage is Nil
  This is not the entire document and there are plenty of other clauses and sub clauses which most of us are simply not aware of at the time of buying the insurance.
  So next time you buy insurance try to spend some time and read the fine print.

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