“Car insurance policies more often than not default to the retail value in the dealer’s handbook. This is often simply referred to as the ‘book’ value. In the case of new cars they tend to ensure at the manufacturer’s recommended list price,” he explains. “If you take into account that a new car typically drops significantly in value the minute you drive it off the showroom floor, it follows that many cars will be insured for values higher than their used car market value.”
He gives an example: “If you buy a brand-new car for R300 000 and then needed to replace it six months later with an equivalent second-hand model, it would cost, for instance, R250 000. If your goal is just to replace it with an equivalent car, the premiums you have been paying on that additional R50 000 have been unnecessary. But if you prefer to replace it with a brand-new car, you might not regret the additional premiums.”
Over-insurance is not just limited to new vehicles. Morgan says that getWorth’s data has identified numerous instances of older vehicles where the book value is higher than the actual market value of the car. The Santam survey showed that 29% of owners were willing to receive the market value of their stolen car and 23% said they wanted a similar replacement vehicle.
Morgan says that your insurance should take in to account your particular circumstances. He gives another example: “Let’s say you took out vehicle finance on a new car, with zero deposit. There is almost certainly a period – sometimes up to three or four years – when the insured value of your car is less than the outstanding amount of the loan. If your car is stolen or written off, the insurer will pay out the insured value – normally the ‘book’ value – and you will have a shortfall that you need to repay to your bank. It can put you in a difficult position if you don’t have the cash.”
Many insurers offer an additional type of insurance called gap cover or credit shortfall insurance that will pay out the shortfall between the car’s value and the outstanding car loan amount. This can be a useful cover for anyone who is concerned about a loan shortfall in the event of a total loss.
WHAT SHOULD YOU CHOOSE?
Most insurance companies recommend that you insure your car for its retail value as this is the closest amount to its replacement value. They typically use the retail ‘book’ value. Morgan says that it is possible to obtain cover from an insurer at a lower value than the ‘book’ value. If you are well informed about the actual market value or replacement value of your car, you can speak to your insurer about reducing your maximum cover. However, the premiums generally won’t reduce by the same proportion and it may not be worth the trouble. Morgan advises “A good practical step is to ensure that your insurance company reviews your vehicle value and premiums regularly, so that at least your premiums reduce as your vehicle depreciates.”
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