It’s common for a vehicle owner whose car is written off or stolen to feel that the replacement value offered by their insurer is inadequate. Many vehicle owners are unaware of an often overlooked but vital piece of information: the value assigned to your vehicle.
This seemingly small detail can be the decisive factor that determines whether you are adequately insured, or unwittingly underinsured.
The latest South African Police Service quarterly crime statistics, for the second quarter of the year, notes that 5,119 cars were hijacked between 1 January and 31 March 2023. This equates to 57 cars being stolen in the country every day.
Many vehicle owners find themselves facing the harsh reality of inadequate coverage when this kind of incident happens.
Three key vehicle values
- It pays to know the difference between three vehicle values: trade-in, retail, and market value when insuring your vehicle.
- The trade-in (or ‘book’) value is the amount a car dealership pays you when you trade a car in. It’s the lowest value for which you can insure your vehicle.
- The retail value is the amount a car dealership would get for your vehicle if they were to sell it. Insuring for retail value should allow you to replace your car with one of similar value without having to pay in.
- The market value is the price agreed upon by a willing buyer and seller, but in the case of car insurance, it is usually defined as the average, or midpoint, between the trade and the retail value.
Market value & Retail value
Many insurers will insure for market value, which looks attractive to the customer because premiums are lower. The downside is that you may be underinsured, which puts you in a vulnerable position, especially if your car is stolen or written off while it’s still under financing.
While other insurance companies recommend that you insure your vehicle for retail value, but take out credit shortfall insurance to cover the gap between what you owe the finance house and the value for which the car is insured.
Credit shortfall usually covers the full difference between your insurance payout and the outstanding balance on your loan, including any applicable residual or balloon payment. It’s important to ensure you explicitly increase your level of cover by specifying any additions to your car, such as leather seats, LED headlights, or a roof rack, as these items are usually not part of the default value.
Vehicle valuations fluctuate
Market value fluctuates, and your vehicle could be underinsured or overinsured because of this. For example, you may have bought a vehicle for R2m in October last year and insured it for R2m, but you could easily buy a vehicle of the same make and model for R1.4m this year.
It’s recommended that you ask your insurer what the current value of the vehicle is, and consider whether you’re happy to drive the car if there’s a gap between what you’d pay for it and the value for which it’s insured.
Most of us don’t overthink car insurance when we drive a new vehicle off the dealership floor. However, the repercussions of undervaluing your prized wheels can hit hard. Rather inform yourself about the true worth of your vehicle and adjust your insurance coverage if necessary. You don’t want to be left grappling with hefty expenses and regret.
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