Explain the Calculation for Car Insurance Premium


When you compare car insurance, you may inevitably look at the premium amount as a deciding factor to buy the policy. But do you know how the premium is calculated? Read on to know more about it.

Today, owning a car is not just a status symbol but a necessity too. For many, buying a car is like achieving a milestone. If you have recently purchased a car, it is a prudent choice to protect your asset by purchasing a car insurance policy. In India, there are two types of car insurance policies – Third-party insurance and comprehensive insurance.

 Third-party insurance is a basic policy and is a mandatory requirement for all car owners. Since it covers only damages to the third-party, the premium is affordable. Comprehensive insurance, on the other hand, provides more extensive coverage, and it offers protection against both third-party liabilities and damages to your car. The premium for comprehensive car insurance is higher than a third-party policy.

 How is the premium calculated?

 The insurance companies use a simple formula to calculate the car insurance policy, which is:

 Premium = own damage premium – (no claim bonus + discounts) + liability premium as determined by the IRDA + cost of add-ons purchased

 Factors that affect the premium amount

 While fixing the premium cost, insurance companies consider different variables, which are:

  • Age of the policyholder

The insurance companies usually charge a higher premium for policyholders aged below 25 years, as they are perceived to be high-risk drivers. So, if you fall in the 18-25 age bracket, you may have to shell out more than those who are old aged.

  • Car model and variant

High-end luxury and sports cars like Bentley, BMW or Jaguar attract a higher premium as compared to other budget cars like Maruti Alto or Tata Nano.

  • Fuel Type

If you drive a car that runs on CNG, you may have to pay a higher premium as the insurers consider the CNG-fitted vehicles to be at higher risk of accidents as compared to cars that run on petrol or diesel.

  • Security devices

Every time you file a claim, it is a liability for the insurance company. So, to encourage the policyholders to drive safely, the insurance companies offer an attractive discount to applicants who have installed high-end safety devices and anti-theft devices in their car.

  • NCB

NCB or No Claim Bonus is a reward offered by the insurance companies to policyholders who do not file for a claim during a policy year. The reward offered is in terms of discount on the premium upon renewal. So, if you have accumulated NCB points, you can redeem it at the time of renewal and get a discount on your premium. The maximum discount you get is up to 50% provided you do not file for a single claim for five consecutive years and renew your policy diligently before the maturity date.

Using Car Insurance Calculator

To avoid the hassles of manual calculation and know the exact premium amount payable for the policy you choose, you can use the car insurance premium calculator. It is an online tool offered by all insurance companies. The tool is easy to use; you must enter a few details like car model, car manufacturer’s name, fuel type, registration date, etc. and the tool will automatically compute the premium as per the details entered.

The online car insurance calculator gives you accurate results, and you can change the details multiple times to know the premium amount as per your requirement. Another significant benefit using the car insurance premium calculator is that it eliminates the risk of human error and gives you results within seconds. It is an excellent tool to understand the nuances of the plan, which in turn helps you take an informed car insurance purchase decision.

Final Word

Now that you understand how the car insurance premium is calculated, it is paramount that you compare the different plans, and choose the right policy that has an affordable premium and suits your specific needs. Lastly, do not forget to read the policy terms and conditions before you sign the policy papers.

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