Many consumers simply take out car insurance without questioning what the true value of their car is. This can result in a consumer either over insuring their car – and therefore paying too much – or finding themselves under-insured when something happens to their car.<\/p>\n
A survey conducted by Santam earlier this year found that 45% of the 1 900 respondents did not know the monetary value of their car, yet 48% expected the full amount for which their car was insured if their vehicle was stolen.<\/p>\n
Colin Morgan, director at car retailer GetWorth, says that they have heard from many customers who have discovered they are over insuring their cars.<\/p>\n
“Car insurance policies more often than not default to the retail value in the dealer\u2019s handbook. This is often simply referred to as the \u2018book\u2019 value. In the case of new cars they tend to insure at the manufacturer\u2019s recommended list price,” he said.<\/p>\n
“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.”<\/p>\n
He provided the following 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.<\/p>\n
“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.”<\/p>\n
Over-insurance is not just limited to new vehicles. Morgan said that GetWorth\u2019s data has identified numerous instances of older vehicles where the book value is higher than the actual market value of the car.<\/p>\n
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.<\/p>\n
Morgan said that your insurance should take in to account your particular circumstances.<\/p>\n
He cited another example: “Let\u2019s say you took out vehicle finance on a new car, with zero deposit. There is almost certainly a period \u2013 sometimes up to three or four years \u2013 when the insured value of your car is less than the outstanding amount of the loan.<\/p>\n
“If your car is stolen or written off, the insurer will pay out the insured value – normally the \u2018book\u2019 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\u2019t have the cash.”<\/p>\n
Many insurers offer an additional type of insurance called gap cover or credit shortfall insurance that will pay out the shortfall between the car\u2019s 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.<\/p>\n
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 \u2018book\u2019 value.<\/p>\n
Morgan said that it is possible to obtain cover from an insurer at a lower value than the \u2018book\u2019 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.<\/p>\n
However, the premiums generally won\u2019t reduce by the same proportion and it may not be worth the trouble.\u00a0 “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,” he said.<\/p>\n
He also noted that gap cover can be relatively expensive. “If you take credit shortfall cover, keep an eye on your car and your loan values. When the time comes that the amount owing on your car is less than the value of the vehicle, credit shortfall insurance will no longer be required and should be cancelled.”<\/p>\n