When a vehicle is written off or stolen, an insurer will pay out the insured based on the value specified by the policy, being either market or retail value. The retail value is what is generally known as “book value” and is based on the Trans-Union Auto Dealers’ Guide, whereas market value factors in conditions more specific to the particular car.
Because market value is traditionally less than retail value, it results in lower monthly insurance premiums, a very attractive option during tough economic times. But according to Susan Steward of Budget Insurance, even when a vehicle is insured at retail value, there will still be a shortfall during total loss.
“Regardless of whether you insure your car for retail or market value, the reality is that if you are in an accident and the car is written off, the insurance pay-out is not going to cover the full amount you owe the bank,” says Steward.
“The tricky thing is if you are financing your car, the bank charges you interest upfront and with car loans moving to agreements as long as seven years, this interest amount adds up to a significant number. We advise clients who have financed their cars through the bank to make use of Auto Top-up cover, which covers the difference between the insured value of the car and the amount you owe on your loan,” she says.
“At a time when many consumers are battling to make ends meet, the last thing you want is to have an accident where the car is written off and find out that you owe the bank a significant amount of money despite having insurance cover. The financial trauma of a write-off is bad enough on its own. Make sure you have the right cover in place to avoid a financial shortfall that prevents you from replacing your car.”
Budget Insurance gives the following tips when shopping for top-up insurance cover:
- Check whether the product covers balloon payment.
- Make sure to read the fine print to have a better understanding of what you are buying.
- Take time to ensure policy values are updated annually.
- At some stage the amount that you owe on your car finance will be less than the insured value of your car, meaning that there is no more need for a top-up cover.
- Accessories might need be listed and insured separately.
- Determine whether the product include an instalment protector benefit.