Car Insurance: All You Need to Know

If you have a car, chances are you have car insurance for it. But how much do you understand about what kind of policy you have and what policy is best for you, given the risks that you want to protect against?

The Indian government mandates that every vehicle plying on the road should be insured, with insurance in the country regulated by the Insurance Regulatory Authority of India (IRDA).

Auto insurance covers all kinds of losses or damage caused to the automobile and/or its parts due to both natural and man made calamities. Covers offered however range from individual owner of the vehicle to passengers and third party liability.

Insurance can be taken for private cars, two wheelers and commercial vehicles - new and used.

Here, we elaborate on some of the basics that you need to know about car insurance:

Why do you need car insurance?

You need car insurance because it is mandatory - it's the law. For any vehicle to drive on Indian roads, it must have a valid insurance policy that, at a minimum at least, covers the cost of damage that you might cause to other people or vehicles.

Rather than have to pay from your own pocket, if you have a valid car insurance policy, the insurer will assume the liability, as long as the damage is covered under the terms of the insurance contract and there is no case of fraud.

Situations where a car insurance policy can cover costs are damages arising from an accident, theft, fire and any natural calamities like flood, earthquake, or cyclone.

Car insurance policies are valid only for a year and need to be renewed annually.

Even though the law requires every car to have a valid policy, the reality is that there are still lakhs of vehicles in India that are not insured.

This is because people want to save money by not paying insurance and the policing system to check if every car is insured is not perfect. Nevertheless, it is worth spending a few thousand rupees to get car insurance, so that you don't put yourself under any out of pocket risk if you are in the unfortunate situation of an accident or injury.

What are the different types of insurance?

There are two types of car insurance policies: third party and comprehensive.

1. Third party insurance: If someone else is injured or their vehicle is damaged as a result of your driving, then this "third party" needs to be compensated for it. So, the law requires that at a minimum you have third party insurance to protect against the risk of damage you might cause to others, so that they are not financially worse off.

For instance, if you meet with an accident while driving, a third party insurance policy will meet any claims for damage to the other car and take care of any medical expenses for the individuals in that car.

The premium for this type of policy is calculated on the basis of the engine capacity of your own vehicle. Since the cover only includes third party damage, the premium is less compared to a complete coverage policy.

A third party policy will not cover any damage that you or your car suffers.

2. Comprehensive insurance: Unlike a third party policy which covers damage that you cause to "third parties", a comprehensive policy offers complete coverage for both third party and own damage liability.

Comprehensive insurance can include damage to your own vehicle and the other party's vehicle in case of an accident, medical expenses for the other party, you, and passengers in your vehicle.

In addition to this, the policy also covers any damage to your vehicle due to any natural calamity, loss or damage to your vehicle due to reasons like theft, burglary, terrorist activity, and any repair in transit.

You can even opt for a cover for your car accessories like music system and air conditioner under this policy.

The premium in comprehensive insurance is calculated on the basis of the insurable value of your vehicle. Since the cover in this policy is wide, the premium is also higher compared to a third party policy.

How should you decide what coverage to get?

When deciding the policy you should get, you must have two things in mind:

1. Your capacity to pay the premium: In case you have existing loans, and any other monetary obligations to meet, you should analyse if you have the capacity to meet the premium due for your car insurance.

Also, keep in mind that third party insurance is the legal minimum cover that you need. Anything you want above that depends upon what kind of risk you can afford to protect.

2. Additional scope of coverage: You might want an all-inclusive policy for your car for a wider protection. This can be done by getting an additional coverage. Depending upon the kind of situations you want to cover, the premium amount will vary as you keep extending the range of coverage and damages. The types of coverage that you can get include the following:

a) Personal injury protection: This covers you and any passengers in your car against any harm at the time of an accident. If you want to get coverage for a driver then that is another feature.

b) Uninsured/Under-insured coverage: This covers any expense if you are hit by someone whose vehicle is either not insured or under-insured.

c) Collision: This covers repairs to your car in case of an accident by another vehicle, or object. It will take care of expenses on the repair of your vehicle excluding the voluntary amount that you want to pay on your own.

d) Car accessories: You can have an additional cover against damage to your car accessories like music system and air conditioner.

With every successive year, as the car ages, the value of the car will also go down. This will get reflected in a lower premium for your car insurance if you get a comprehensive policy.

If, however, you have only a third party cover, the premium amount will generally not vary by age, as the engine size of your car will stay the same. In the third party premium amount, the premium comprises the minimum amount you pay for third party cover and then some add-ons on top of that.