It’s always a good idea to shop around for the best-value car insurance, but it’s important that you understand what you are paying for. One of the big differences in the cost of the premium is whether you are insured at retail value, market value, or a third, less-known option: agreed value.
The retail value is what it would cost to replace your current car. In other words, this is what it would cost to buy your car from a dealer, considering its age, condition and mileage. The retail value is higher than the market value, which is what you’d be able to sell your car for at any given time.
If you are insured at market value you may get a shock when claiming because you will be paid out less than what it would cost to replace your car. For this reason, it is generally recommended that you opt for retail value.
However, even retail value has its limits. For example, you may be driving a five-year-old car which you bought new. You are confident that it has been maintained properly and you know there are no issues with the car. If you are paid out at retail value, it means you would only have enough money to buy a five-year old car of the same model. You may feel less comfortable buying a car with that mileage so you end up putting money in to buy a newer model.
In this case you may consider insuring your car for an agreed value. Wynand van Vuuren, the client experience partner at King Price Insurance, explains that insuring for an agreed value means that you will be covered for an amount that’s agreed between you and your insurer, for an agreed period. This means that if your car is written off or stolen, you’ll know exactly how much your payout will be.
“Agreed value insurance has traditionally been reserved for classic and rare vehicles that are hard to replace in the open market, but it’s starting to become an option for car owners who want the certainty of knowing how much they’ll be paid out if disaster strikes,” said van Vuuren.
You can only insure your car for an agreed value at a maximum of 20% above the retail value and you would pay a higher premium. The agreed value is only valid for three years. After that, it needs to be reviewed to take inflationary and other factors into account.
We requested a quote from King Price to understand the cost implications of insuring at agreed value.
We used the example of a 2020 Suzuki Swift driven by a 30-year-old woman living in Randburg. The agreed value is guaranteed for three years. (Note premiums are dependent on risk profiles so this is purely for illustration purposes.)
- Insured at retail value, she would pay R788 a month. The retail value is currently R144 300, however, this will depreciate each year.
- Insured at an agreed value equal to the current retail value, she would pay R796 a month. For the extra R10 her agreed value would remain at R144 300 for the next three years and would not depreciate.
- If she insured at an agree value of R173 000, which is 20% (R29 000) higher than the current retail value, she would pay an extra R74 a month. Over three years that would cost an additional R2 664.
As van Vuuren explains, there is no right or wrong answer. While it is great to have all the bells and whistles, you need to decide what fits your pocket and what risks you are comfortable with that can be self funded.
Factors to consider
Agreed value is only beneficial if the car is stolen or completely written off. It has no benefit for repairs, which make up 85% of car insurance claims. You may decide that the extra premium would be better spent on car hire if your car is in for repair, or to reduce the excess you would owe in the case of an accident.
With the rising number of potholes, extra cover for tyres and rims may be another consideration.
Ideally you want to at least insure for retail value, but if your budget is stretched then you can lower your premium by opting for market value.
If times are really tough, make sure you have some form of insurance like third party. If you don’t have the money to pay for third-party insurance, you definitely would not have the funds to pay for the damage done to another car. For just over R100 a month, rather cut back on another expense than risk financial ruin.
Credit shortfall vs agreed value
Agreed value is not to be confused with credit shortfall insurance. Credit shortfall insurance is the difference between the retail value of the car and what you still owe the bank. So, if your car is still new, and it’s insured for its retail value, chances are you owe the bank more than the car is actually worth.
Credit shortfall cover, which is an add-on insurance product, ensures that the bank receives the full outstanding amount if the car is written-off or stolen. Credit shortfall doesn’t cover the gap between a car’s retail value and the price of an equivalent new car.
This article first appeared in City Press.