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How Vehicle Insurance Premium is Calculated

Irrespective of the vehicle being bought for commercial or personal use, Vehicle Insurance becomes unavoidable for every vehicle owner. While purchasing a new vehicle, first, you need to take insurance for the same even before bringing your vehicle on the road. Getting insurance for your vehicle is a safety measure for yourself and the public in the traffic and hence a legal obligation. Most people do not understand the functioning of insurance, thinking it is difficult. We are here to make you understand the concept and process of vehicle insurance. Go through the following information to know more about the premium calculation for your vehicle

Process of Vehicle Insurance

Vehicle Insurance is also referred to as Motor Insurance or Auto Insurance. It is a contract between the insured and the insurer that protects the insured against financial loss in case of any accident or theft. The insured has to pay a premium; in exchange for that, the insurer agrees to pay for your losses as decided in the policy.

In simple terms, this is insurance for all the vehicles on the road, mainly cars, motorcycles, and trucks. The primary aim of vehicle insurance is to provide financial protection to the insured against theft and damage or physical injury caused by traffic collisions. It also protects against the liability arising from some incidents in the vehicle.

The insurer agrees to pay for your losses as mentioned in the policy in exchange for your premium. In the case of standard policies, all the terms and conditions are pre-defined, which you need to follow. And, in the case of customized policies, the pricing is done individually to allow customization of the coverage amounts per your particular needs and budget. Vehicle insurance policies are mostly renewable with 12 months timeframe.

The insurer notifies you before the expiry period of cover for renewal and payment of the premium. During this period of cover, if you meet with an accident or any other issues covered under your policy, you will be able to claim for the same with your insurance policy. Fortunately, if nothing goes wrong in your period of cover, then the insurers allow No-Claim Bonus (NCB) at the time of renewal of your policy.

Calculating the Vehicle Insurance Premium

To understand the calculation of premium, let's begin with the factors determining the premium for vehicle insurance.

According to the track records, vehicle owners under 25 years are mostly involved in a mishap or road accidents. That's why individuals aged between 18-25 are charged a higher premium for coverage than others.

  • Type of fuel required for the vehicle

The CNG (Compressed Natural Gas) fitted vehicles are charged a higher premium than regular petrol/diesel-run vehicles.

  • Geographical location

The rural locations or areas with lower risks and traffic density will be charged lower premium rates than areas with a higher traffic density, such as urban cities.

  • Insured Declared Value (IDV)

IDV is the maximum amount an insured will receive from the insurer in case of theft or total loss of the vehicle. The factors on which the IDV depends are the brand, the model of the vehicle, the manufacturer's selling price, RTO details, etc.

  • Cubic Capacity of the vehicle

The vehicle's Cubic capacity also helps determine the premium for the Own Damage cover. The vehicle's make, variant, and model also affect the premium for insurance coverage.

  • Manufacturing year of the vehicle

Old cars with lower IDV indicate that the premium for the old vehicle will be comparatively lesser than that for new vehicles with relatively higher IDV.

  • No claim bonus (NCB)

NCB is a discount in the premium for Own damage cover in case of no claim filed during the period of cover of the policy. This is offered to the insured for the number of claim-less years.

  • Anti-theft discount

Vehicles with ARAI (Automotive Research Association of India) approved anti-theft devices fitted to get a discount of 2.5% on the premium rates.

Following are the components of the vehicle insurance premium-

Personal Accident Cover –

This component in the premium safeguards insured persons from accidents and mishaps causing disability. As a probable outcome of any road traffic accident, this coverage is an essential component of insurance plans. The premium for this cover increases with the increased sum insured.

Own Damage Cover –

Own damage insurance cover is a beneficial option for insured persons. A motor insurance plan does not always cover damages caused by storms, fires, earthquakes, and accidents. It is always best to invest in a higher IDV that helps increase the premium amount; however, as the vehicle ages, the IDV decreases.

Third-Party Cover –

The reason behind mandatory third-party liability vehicle insurance in India is that the insured person gets protected from liabilities caused due to accidents. Since this cover does not include repair costs, you must choose a policy covering damages caused to own vehicles.

Other Riders –

You should also invest in riders which are add-on plans. The biggest advantage of riders is that they protect the policyholder's interests with a small amount of money. Roadside assistance is a popular rider that comes in handy when traveling in an unfamiliar area.

In this way, the premium for vehicle insurance is calculated after considering the above factors and components.

Why It is Important to Have a Vehicle Insurance

The importance of having insurance for your vehicle is undoubted. Let's look at the following points, which highlight the vitality of vehicle insurance.

  • Vehicle insurance is often mandatory by law.

In most countries, buying insurance for your vehicle is mandatory by law. It is always better to buy one in case of mandatory things than to be forced by someone.

  • Vehicle insurance covers you in case you cause an accident.

Being the cause of an accident is stressful for the driver, as it involves paying the costs. But, if you have vehicle insurance, it covers you in such cases.

  • Vehicle insurance protects passengers.

When an insured vehicle meets with an accident, the insurance company also provides cover for injuries suffered by the passengers.

  • Vehicle insurance simplifies things.

Having insured with one of the best insurance providers is always better because it simplifies things involved with accidents and further procedures.

  • Vehicle insurance can supplement your basic health insurance.

It can simply work as supplementary to your basic health insurance plan, as it can pay for the medical bills not covered under your health insurance in case of an accident.

  • Vehicle insurance protects your assets.

If you don't have insurance and meet with an accident, the entire cost must be borne by you, which directly affects your financial savings. Having insurance protects your assets.

  • Vehicle insurance gives you peace of mind.

By availing of vehicle insurance, you can be worry-free and enjoy peace of mind. An insurance policy takes care of your vehicle, family, and you.


After understanding the importance of having insurance for your vehicle and knowing the process of calculating the premium for an insurance policy, it becomes easy for you to make a better choice regarding buying the best insurance plan for your vehicle. Buy insurance for your vehicle today and be worry-free.



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