What is IDV and how does it work?

Posted on: Feb 10, 2022 | | Written by:

What is IDV and how does it work?

Published on February 9, 2022. EST READ TIME: 3 minutes

It is necessary to get your car or two-wheeler insured with an adequate cover if you do not want to run into legal or financial hassles in India. Almost all modern vehicles are rather expensive to buy and very costly to repair. So, in case your vehicle gets damaged in an accident or natural calamity, you surely don’t want to foot the repair bills from your savings. That is where comprehensive car insurance comes in handy and protects you financially. Having proper insurance means that the insurer will bear the larger portion of the repair cost. The insurance company will pay up to a set value of the vehicle, which they identify as Insured Declared Value or IDV.

Now, if you are not familiar with the concept of IDV or don’t understand it too well, here are 6 pointers that can help you.

1. The concept of IDV:

When the insurance company issues a policy on your vehicle, they decide the value of your vehicle. This is roughly equal to what the insurance company estimates to be the current value of your vehicle in the open market. As you use your vehicle, it will experience wear and tear. This means that the value of your vehicle will reduce over time, and hence, the IDV will be readjusted year on year.

2. IDV is the lynchpin of motor insurance policies:

The insured declared value of your vehicle is the maximum amount of money that the insurance company will pay if you make a claim on your vehicle. For instance, if you meet with an accident and your vehicle is declared a total loss, the IDV will be used as the starting point for payment by the car insurance company. From this, they will deduct depreciation and other deductibles as stated in your motor insurance policy. For situations where your vehicle gets stolen, the same process is used to calculate the amount that will be paid to you as compensation.

3. How is IDV determined:

Insurance companies have a set of formulas to derive the IDV of your vehicle. When you buy a new vehicle and want to get it insured, the company will take the invoice value of your vehicle and start with it as a base. Note that when your purchase a vehicle, you pay fees to register it as well as pay road tax on it. Some states may also charge parking fees or octroi on it. All these are not counted in IDV, as only the invoice value of the vehicle is counted as base.

4. Can IDV be customised:

One great thing about how IDV works is that you can choose your custom IDV, as long as it falls under certain limitations. The reason you can customise IDV is because it allows you to protect many investments you may have done to improve upon your vehicle. Let us say you got an aftermarket CNG kit installed in your car. The kit is expensive and needs insurance protection. You can approach the company to get your vehicle details updated by mentioning that your car is now fitted with CNG and pay a bit of extra premium to cover it as well. Upon next renewal, you can choose your IDV, and your premium will be adjusted accordingly.

5. Relation between your insurance premium and vehicle IDV:

Your insurance premium is directly proportional to the Insured Declared Value of your vehicle. The higher the value of your car, the more risk the insurance company need to bear to provide it adequate protection. As a result, they will have to charge you higher premium amounts. This is the reason why the premium of car insurance is way higher than two-wheeler insurance because the IDV of a car is higher than that of a two-wheeler. Further, as you raise the IDV of your vehicle, the premium cost goes up. Even though this may seem counterintuitive, its best to choose the maximum possible IDV for your vehicle.

6. Why is it a good idea to take the maximum possible IDV:

Many people try to reduce the IDV of their vehicle to reduce the premium cost of their insurance policy. But this is an unwise decision. Instead, you may want to get the maximum possible IDV. As mentioned earlier, IDV is the notional value of your vehicle including all its parts, if it is sold in the open market today. If you need to repair your vehicle and replace some of its parts, they will come at full price. Imagine if the transmission of your vehicle is damaged in an accident and reeds to be replaced, the transmission itself may end up costing more than the car IDV! In this case, you will either need to pay from your own pocket or write off the vehicle. Having higher IDV will however protect you from such a problem.

In summary, what you need to know is that it is best to pay some extra money upfront (in the form of premium) to get the maximum possible IDV, so that your insurance is robust enough to cover almost all your financial losses, if such a situation arises.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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