Insurance, suddenly, has taken centre-stage because of the increasing penchant of individuals towards all kinds of loans. With the consumer becoming more loan-friendly, the obvious fallout has been the requirement to stack up on insurance as well.

However, taking insurance has not been made mandatory by most banks. Of course, there is an occasional bank that might insist (read request) you to take an insurance policy, if you are taking a home loan. But legally, they cannot force you to take one.

But the only purchase where it is mandatory to have an insurance is in case of purchasing automobiles. That is, it is imperative that you have car insurance as soon as you purchase your car.

In fact, according to the Motor Vehicles Act, 1988, it is mandatory for every owner of a vehicle plying on public roads to take an insurance policy to cover the amount, which the owner becomes legally liable to pay as damages to third parties as a result of accidental death, bodily injury or damage to property. Also, it is necessary for you to always carry the certificate of insurance in the vehicle as proof.

There are basically two types of motor insurance policies. Type I, which is better known as Third Party Insurance (Form A), is the one which is compulsory. This covers the policyholder against damage to a third-party's property or the third parties themselves.

In simple words, if you were to run into another car and cause damage to that car and injure the occupant(s) of that car, a third party only policy will pay for the repair of the other vehicle, and will pay for any medical claims or injuries suffered by the occupant(s) of the other car and any passengers in your car other than you.

But this policy does not cover the costs of repairing your own vehicle. However, you could add some riders to this policy that would cover for your legal liability to pay compensation for:

• Death or bodily injury to a third-party person
• Damage to third-party property

Liability is covered for an unlimited amount in respect of death or injury and damage to third-party property for Rs 7.5 lakh under commercial vehicle and cars and Rs 1 lakh for scooters and motor cycles

Moreover, there are additional riders for third-party fire and theft as well. That is, if your vehicle is stolen or is set on fire, these riders cover them as well.

Type-II policy, better known as the comprehensive car insurance cover (Form B) covers payout for third-party damages and injuries, will pay out in the event of your vehicle being stolen or set on fire, and will also pay for any damage to your own vehicle (regardless of whose fault the accident was).

In addition to the coverage under liability only, this policy covers loss or damage to the insured vehicle and its accessories due to fire, explosion, self-ignition or lightning, burglary, riot and strike, malicious act, terrorist act, earthquake, (fire and shock) damage, flood, typhoon, hurricane, storm, tempest, inundation, cyclone and hailstorm, transit by road, inland waterway, lift, elevator or air. So, this brings us to what type of car insurance cover is best for you?  As a general rule of thumb, the following points are worth noting:

If you are young and driving an inexpensive first car then you will probably find the cost of comprehensive motor insurance very high. For instance, a 20 year-old buys a second-hand car for Rs 1.5 lakh. In this case, the cost of a comprehensive policy would be higher as compared to the cost for a third-party fire and theft policy.

Of course, if there is an accident and you are at fault and your car is badly damaged, then it you will have to pay for the repair or replacement of the car.  But if you are young and driving a more expensive car, then it will make sense for you to have comprehensive insurance.

Remember that the no-claim bonus follows the individual and not the vehicle. So you will be able to garner good discounts on renewal of the policy. The bonus ranges from 20 per cent to 50 per cent, depending on the number of years for which no claim has been made.

Some important exclusions under this policy include wear and tear, breakdowns, consequential loss, loss when driving with invalid driving licence or under the influence of alcohol, use of vehicle otherwise than in accordance with limitations as to use, etc.

Now, you can do online processing of claims and premium payments. This implies that life is going to become much easier for the end user.

The writer is head of financial planning at Sykes & Ray Equities.