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Insurance is a tool to manage your risk. By buying an insurance, you purchase protection against unexpected financial losses. The insurance company pays you or someone your nominee(s) in an event of something bad happening to you. If you do not have an insurance and an accident happens, you may be responsible for all related costs.

There are two broad forms of insurance; Life Insurance and General Insurance. The main difference between life insurance and general insurance is that while former covers the life-risk of the insured, the latter offers financial protection against damage or loss other than life.

Some of the most popular types of general insurance available in India are; Health Insurance, Motor Insurance, Home Insurance, Fire Insurance. Travel Insurance & Marine Insurance.

An “insurer” or the insurance company is a financial organization that provides a range of insurance policies to protect individuals, families and businesses against the difficulties of financial losses in return for regular payments of premiums. The key responsibility of Insurance Company is to provide financial cover to their customer in the form of sum assured in case of occurrence of an adverse event, as stated in the policy.

Third-party motor insurance or third-party liability cover is a statutory requirement under the Motor Vehicles Act, 1988. It is referred to as a 'third-party' cover as the beneficiary of the policy is someone other than the two parties involved in the contract (the car owner and the insurance company). The policy does not provide any coverage to the policyholder. However, it covers the insured person's legal liability for death/disability of third-party loss or damage to the third-party property. Third-party liability is sometimes also referred to as the 'act only' cover.

As Third-party insurance is statutory requirement, all non-life insurance companies are mandated to provide this cover to vehicle owners. In the Indian context, automobile dealers have an obligation arrange for a comprehensive insurance cover along with vehicle registration. Auto dealers provide this comprehensive cover as an add-on to the mandatory third party.

IDV refers to Insured Declared Value and is the maximum sum assured fixed by the insurer that is offered to you in case of theft or total loss of your vehicle. In short, IDV is the current market value of your vehicle fixed by the insurer.

Formula for calculating IDV for a new car that is equipped with extra accessories:

Insured Declared Value = [Company’s listed price – the depreciation value] + [Cost of vehicle accessories - the depreciation value of these parts]

Formula for calculating IDV of relatively older car that is not equipped with extra accessories:

IDV = Manufacturer’s registered price – the value of depreciation

Your car insurance premium is directly proportional to the IDV of your car. This means the higher the IDV, the more will be the amount of premium charged to you. You reduce the amount of premium by keep the IDV of your car lower than current market value. However, it is not advisable to opt for a lower IDV just to reduce the premium amount, as this may result in losses.

Insurance works based on the principle of pooling of risks. Insurance companies aggregate small risks spread across a large number of policyholders. In lieu of taking the risk, companies charge an insurance premium. In case the covered mishap occurs, insurers are liable to cover the damages.