In South Africa we have a multitude of car insurance companies, every one of them claiming to be better than the next. With the monthly insurance premiums increasing recently (annual increases) I’ve done some research on the different companies and what they have to offer. This brought to my attention slight differences which could have a big financial impact should you ever need to claim from your car insurance company.
Four of the most important factors you should know about when choosing the type of insurance you sign up for are market value vs. retail value, fixed excess vs. percentage based excess, asset depreciation and third party insurance.
What is the difference between insuring your car at market value or retail value?
Having your car insured at its retail value allows you to replace your car in the event of it being written off, stolen or hijacked and not recovered by a similar priced vehicle. Retail is the price a dealer would pay for your car, taking its age, condition and mileage into account. Basically, the value of your car should you walk into a dealer and purchase your exact same car again.
Market value insurance is the lesser of the two. Here they calculate the average between the retail and trade value of your car. This could easily cause you to be paid 10-20% less by your insurance company towards replacing the car you lost, meaning you would have to take the difference out of your own pocket, or settle for a cheaper car to replace the one you lost.
Having your car insured at market value will decrease your monthly premium, but should you ever need to claim, be prepared to personally contribute a large sum of money.
What is the difference between fixed excess and percentage based excess?
An excess is the amount you have to pay towards the damage yourself when registering an insurance claim. They use this amount to discourage the insured from just claiming for any small little thing.
A fixed excess is a fixed amount you would need to contribute towards the value of your claim. If your excess is fixed at R2000, that is the only amount you would need to pay out of your own pocket towards the claim. Nothing more, nothing less.
A percentage based excess is a percentage of the value of your claim. For example: When you have a claim worth R100,000 and your car insurer requires a 15% excess, you would have to pay R15,000 toward the damage from your own pocket. Depending on the value of the claim, this could be a substantial amount. Imagine paying 15% on a claim worth R500,000.
What does depreciation have to do with car insurance?
Your car becomes worth less every day and with every kilometer you drive. When you sign up for insurance, they insure your car for what it is worth at the time of the agreement. Your monthly premium is calculated on this amount.
As your car depreciates, shouldn’t your monthly premium decrease? Correct!! BUT, most insurance companies in South Africa do not adjust your premium automatically. If you read the fine print in your agreement, you will notice that they make it your responsibility to ask them to review your premium and current vehicle value. Usually they allow these adjustments every 6 months, but only if you ask them.
There are, of course, one or two exceptions to the rule. A very small number of South African car insurers will automatically adjust your premium on a bi-annual or monthly basis. These companies will include these facts in their marketing campaigns (because it is not an industry standard) and you will more than likely already know to whom I am referring.
What is third party insurance and why do I need it?
Third party insurance is probably the most important aspect of a good insurance policy.
By having third party insurance, you are covered against any damage you might cause to another driver’s car or person, so make sure your insurance policy includes this.
Imagine having to pay for the replacement of the other party’s car and medical bills yourself, when you were the cause of the accident. This could account to millions of Rands and may affect your finances for the rest of your life.
Your insurance company will allocate a very precise amount towards your third party cover. This is usually a few million Rand and enough to cover you in most cases.
When choosing your insurance company and premium, make sure you keep these things in mind. Ask them about these things and make sure you understand exactly what your policy terms and conditions are. Do not just look at the monthly saving, as this may hurt you in the long run.